A recent set of articles in Business Week (see Businessweek Online June 8, 2007) suggests that the real cost of offshoring has been understated because there is a “flaw” in the way that price statistics treat offshoring and that, as a result, real GDP and productivity growth are actually less robust than official statistics indicate. However, analysts at BEA—who are continuously updating the official estimates to reflect the impact of globalization—do not think that there is a significant bias on measured GDP or productivity growth.
The argument made in the articles hinges on the fact that the import price data—published by the Bureau of Labor Statistics and used by BEA to “deflate” or convert nominal imports to real imports—do not reflect the full cost saving when foreign suppliers are substituted for domestic suppliers. However, import price indexes are designed to measure the change over time in the prices paid by U.S. residents for imported goods and services; they do not directly compare the prices of imported goods (and services) to their counterparts produced in the United States.
This is a manifestation of an old and difficult problem in price measurement. The argument fails to recognize that an offset occurs when domestic goods and services are purchased in the United States. That is, if real imports are understated because shifts to foreign suppliers are not being adequately captured in the price data, it is also likely that domestic production is understated because of shifts to more efficient domestic suppliers. Furthermore, BEA uses chain-type measures that are designed to account for much of this substitution. Any remaining measurement errors should be offsetting because researchers have not demonstrated that errors in measuring imports are larger than offsetting errors in measuring domestic production.
There is no clear “fix” for the price measurement problem beyond the adoption of chained-dollar estimates to measure real GDP, which BEA adopted in 1996. Nominal, or current-dollar, GDP is not affected because the amount deducted from nominal GDP for imports represents the actual amount spent for imports. Further, there are no distortions in the nominal trade balance, or other nominal measures, such as corporate profits and wages and salaries.