Offshoring, Sourcing Substitution Bias, and the Measurement of Growth in U.S. Gross Domestic Product and Productivity

Abstract

The decade before the financial crisis of 2008 was a time of large changes in sourcing patterns for manufactured goods, particularly after China's entry into the WTO in 2001. Sourcing substitution reduced the prices paid by wholesale level buyers of these goods, but these price reductions were mostly not captured in the U.S. import price indexes and the U.S. GDP deflator. To find plausible values for sourcing bias we first use data on changes in sourcing patterns over 1997–2007 to predict the effect of the reported price discount from the new emerging market suppliers. Next, we compare adjusted import price indexes for products used for household consumption with consumer price indexes. In the GDP deflator for apparel imports, sourcing bias is found to average 0.6 percent per year, and for durable goods it averages 1 percent per year. During the decade of rapidly changing sourcing patterns, a tenth of the reported speedup in multifactor productivity growth of the U.S. private business sector may have come from sourcing bias in the deflators for imports.

Gone with the Headwinds: Global Productivity

“…As Figure 1.1 shows, Byrne, Fernald, and Reinsdorf (2016) estimate upward adjustments to U.S. labor productivity growth that are larger in 2004-14 for improvements in internet access and outlet substitution bias from e-commerce, as well as for new fracking technology. Also, in 1995Also, in -2004, they estimate an upward adjustment for unmeasured investment in intangible assets and a downward adjustment for unmeasured declines in input prices from offshoring to China and other emerging market economies, as documented in Houseman, Kurz, Lengermann and Mandel (2011) and Reinsdorf and Yuskavage (2016). Together, these bring the total adjustment to labor productivity growth in the post-ICT boom to 37 basis points, compared with 41 basis points during the ICT boom years.…”

Statistics to Measure Offshoring and its Impact

“…Reinsdorf and Yuskavage (2016) have recently re-examined the bias in multifactor productivity growth through not accounting for changing sourcing between domestic and imported goods, and find that one-tenth of the reported speedup in productivity over 1997-2007 can be explained by this bias. 8 For example, Costinot, Vogel and Wang (2012) model a sequential supply chain in which mistakes potentially occur at each stage in a continuum.…”

Unit Value Indexes for Exports – New Developments Using Administrative Trade Data

“…When an allgoods import unit value index is calculated with the administrative trade data it shows a flatter price trend than the modified Laspeyres formula used in the official import price index, at a rate of about 2% yearly from 1998 to 2014. Reinsdorf and Yuskavage (2018) also calculate unit values to evaluate sourcing substitution bias of MPIs. All of the research described above supports the use of unit values to mitigate substitution bias and provides impetus to our research to calculate UVIs to replace official import and export price indexes in homogeneous product areas.…”