Measuring Technological Change of Heterogeneous Products

Technological-change measures of heterogeneous products must account for their diverse characteristics. The central task of this report is to develop and apply such measures. The following definition focuses on the heterogeneous nature of products: Technological change of a product, whose characteristics and prices change over time, is the change in total factor inputs required to produce the product, holding characteristics (output) constant. The authors develop a theory of technological design and production to provide an explicit framework in which to place empirical measures of technological change, hedonic price indexes, and cost-estimating relationships. Technological change equations were estimated for milling machines, turbine-powered airliners, and turbine engines. Based on the empirical findings, the authors conclude that, because of omitted variables, the use of product characteristics as a shortcut to measures of value and performance is an uncertain undertaking and cannot be counted on to produce adequate measures of productivity, hedonic prices, or technological change.