Time Dummy Hedonic and Quality‐Adjusted Unit Value Indexes : Do They Really Differ?

One of the main approaches to constructing quality‐adjusted price indexes is the time dummy hedonic method. An alternative but rather unconventional method is the estimation of quality‐adjusted unit value indexes. An advantage of the latter method is the interpretation of the implicit quantity index as the simple ratio of quality‐adjusted or standardized quantities. In this paper we compare the two methods. We show that the expenditure‐share weighted time dummy price index and the quality‐adjusted unit value index can be written as ratios of weighted geometric and harmonic means, respectively, of quality‐adjusted prices. Next, we argue that the two indexes will have similar trends and volatility if the quality‐adjusted prices in the quality‐adjusted unit value index are based on the estimated time dummy model. Our theoretical findings are illustrated on New Zealand scanner data for seven consumer electronics products