Part One: How do economists try to assess, quantify, and adjust for qualitative
ID: 3128387 • Letter: P
Question
Part One: How do economists try to assess, quantify, and adjust for qualitative changes in goods and services over time? For example, my new Samsung S6 is way better than my old Samsung S3 (and they all beat the iPhone by a mile :-)). And it doesn't cost anymore, either. How might an adjustment to the change in value along with the change in cost be made? Hint One: The BLS uses something called a hedonic regression (Unit 4). This is very complicated ... but in your own words, try to explain the basic principle behind this adjustment. Hint Two: The word Hedonic is very meaningful to this principle.
Explanation / Answer
In economics, the hedonic regression (framed within the theory of hedonic demand) is a method to estimate the revealed preference. It is based on the decomposition of an economic good in its most important features and analysis of value-added contribution of each of these characteristics.
It is important to note that the method of hedonic pricing is based on the fact that the prices of goods in a market are affected by its characteristics. For example, the price of a pair of pants depends on the comfort, the fabric used, the brand, shape, etc. So this method helps us to estimate the value of goods based on the willingness of people to pay for the goods as and when its characteristics change.