Economic depreciation of an asset, or cohort of assets, is the decline in the price of the asset (or the price index of the cohort of assets) resulting from an increase in age holding time constant. Measures of depreciation, based either on evidence or assumption, are needed in order to measure capital stocks and income flows from economic entities that use capital. A measure of capital input is needed for empirical productivity studies. Less obviously, a measure of depreciation is needed to obtain flows of income because the flow of capital costs used in production, among other costs, must be subtracted from rev-enues in order to obtain income. Errors in depreciation measurement will lead to errors in measures of costs, income, profit, factor shares, rates of return to various inputs, income tax bases, and productivity.
Quality change, by which I mean the introduction of new goods or improvement in the quality of existing goods, has drawn considerable research attention for several decades. Technological change, of which quality change is a part, appears to be a principal cause of growth as indicated by increases in total factor productivity, output per unit of total factor input. An important aspect of quality change research has been estimation of the rate of change in prices of goods that has resulted from technological progress. Exclud-ing, from total price increase, the portion that resulted from technological change leaves a measure of price change of a constant quality good or constant quality bundle of goods.
In the U.S. this research has been used to isolate cost of living increases in price measures such as the consumer price index. A common and controversial method for doing this has been to employ price hedonics, a method developed extensively in early work on hybrid corn by Zvi Griliches. Price hedonics amounts to estimating the effects, at the margin, using regression methods, of characteristics of complex goods on the prices of the goods.