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This document describes the development of an alternative price deflator that would more appropriately reflect the actual changes in prices in the research and development (R&D) process. The objective is to identify those sectors of the economy where R&D occurs and to identify the price changes that occur within those sectors. This process is accomplished with detailed information describing the component sectors of R&D activity published by the Institute for Defense Analysis. This information is then coupled with the changes in prices reflected in those specific industries or, when specific data were not available, the nearest available proxy. In the case of one major component, several proxies are used to test the sensitivity of the result to the proxies used. This information is then aggregated into a set of composite R&D deflators for each branch of the service and composite R&D deflators for overall defense R&D expenditures. The results of this process are surprising. The resultant R&D indices closely parallel the Gross National Product (GNP) deflator. There is some variability in the series, however, depending upon which proxies are used. The overall result is that the price series derived herein for R&D expenditures are generally close enough to the GNP deflator that, in the interests of parsimony, and subject to the caveats specified in this analysis, the GNP deflator is a reasonable index to use to value out-year research and development expenditures.
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