New product varieties and the measurement of international prices

TLDR

High income elasticity estimates for U.S. imports may be inflated by omitting new product varieties from import price indexes. This paper shows how to incorporate new product varieties into a constant‑elasticity‑of‑substitution aggregate of import prices. The method is applied to U.S. imports of six disaggregated manufactured goods.

Abstract

The high income elasticity of demand often estimated for U.S. imports may be a spurious result of omitting new product varieties from the import price indexes. The purpose of this paper is to demonstrate how to incorporate new product varieties into a constant-elasticity-of-substitution aggregate of import prices. This method is applied to U.S. imports of six disaggregate manufactured goods. It is shown that the corrected indexes are able to account for part--but not all--of the high income elasticities. (JEL C43, F14)