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ECONOMISTS HAVE ATTEMPTED TO ESTIMATE potential gross national product for over a decade now. Potential GNP measures the output the economy would produce if it were operating at some fixed, fairly low level of unemployment, usually defined by an aggregate unemployment rate of about 4 percent. The difference between potential and actual GNP at any point in time is known as the GNP gap. In 1962, Arthur Okun published an analysis that has been the benchmark for official measures of potential GNP ever since, and in the process enunciated what came to be known as Okun's law, which relates the unemployment rate to the percentage GNP gap.' Potential GNP and Okun's law became two of the handiest tools of analysis and presentation for economic stabilization problems. Particularly during the first half of the 1960s, when GNP was running below potential and policy was devoted to closing the gap, no sophisticated analysis of the economy failed to identify the loss in real output that was associated with an economy falling short of full employment. The careful estimation of the full employment surplus in the federal budget has been an important by-product of the estimation of potential * I want to thank Nancy Hwang and Herbert F. Lowrey, Jr., who did all of the computations in this paper. 1. Arthur M. Okun, "Potential GNP: Its Measurement and Significance," in American Statistical Association, Proceedings of the Business and Economic Statistics Section (1962), pp. 98-104.

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and the Measurement of Recent Inflation THE consumer price index in the United States may be the most closely watched economic barometer in the world. Yet in recent years, as the public and the media have paid increasing attention to the monthly CPI announcements, more and more economists and officials have expressed dissatisfaction with the way the CPI measures inflation. The construction of price indexes, once an arcane subject used to torture graduate students, is now a subject debated in the halls of Congress and discussed on the nightly television news. In the wake of the stunning recent gyrations in the CPI inflation rate, this seems an opportune time to reexamine the index-and especially its treatment of housing, which has been so much in the public eye of late. The first three rows of table 1 give a hint both that something is amiss, and that the problem is of recent vintage. The all-items CPI and the implicit deflator for personal consumption expenditures (hereafter PCE deflator) differ in numerous ways. The PCE deflator counts only currently produced consumer goods and services, and-at least in principle-includes them all; the CPI is based on a selected list of about 250 items, including several important used items (used cars, resold houses). The PCE deflator uses current-period weights (a Paasche index), while the 1. The reference here, and elsewhere in the paper, is to the CPI for all urban consumers (CPI-U). The CPI-W covers only urban wage earners and clerical workers, about 45 percent of the population.