Economic Analysis Series No.194THE ECONOMIC ANALYSIS

Measurement of Deflators and Real Value Added in the Service Sector

Kyoji FUKAO, Taisuke KAMEDA, Kota NAKAMURA, Ryoichi NAMBA, Masahiro SATO

The estimation of output and prices in the service sector entails various theoretical and practical difficulties that are distinct from the challenges faced when examining the manufacturing sector. Some of these difficulties are due to the non-existence or limited functioning of the market mechanism in the sector, while others are due to certain economic characteristics of services, such as their intangibility and heterogeneity.

For instance, an area in which the estimation of output is particularly difficult is non-market services. For some publicly provided services, such as government-funded education, the absence of a market means that market prices are not available. For other services, such as medical care, relevant prices may be available, but using such prices may provide misleading valuations of output, since they do not reflect the value that consumers attach to such services, with the discrepancy arising, for example, as a result of asymmetric information or price regulation. However, even in the market sector, there are measurement issues with regard to certain services. An example is retail and wholesale services, for which it is difficult to construct margin price indexes due to the lack of publicly available information.

These difficulties, in turn, make cross-country comparisons of total factor productivity (TFP) growth, which greatly depend on how output and prices are calculated in each country, particularly problematic, since statistical agencies in different countries have adopted different approaches to address these difficulties. For instance, many countries have adopted an input-cost approach for the measurement of non-market services, but the range of service sector industries to which the approach is applied differs across countries. Moreover, some countries incorporate the quality of inputs, such as workers’ educational attainment, into the calculation of input values, while other countries do not. Furthermore, some countries are shifting from the input-cost approach to the estimation of real output by incorporating quality adjustments (such as scholastic ability test results or survival rates) when measuring quantities (such as the number of graduates or patients).

This paper provides a comparison of approaches to the measurement of service sector deflators in Japan and other developed countries such as the United States in order to examine the potential impact of methodological differences on estimates of the macroeconomic performance of these countries. Specifically, we focus on five sectors, namely, (1) construction, (2) wholesale and retail, (3) education, (4) health care, and (5) public administration and defense, compulsory social security, in which we think measurement problems are most serious. Using these international comparisons, we consider how differences in the measurement of deflators affect the measured TFP growth in the countries examined and, furthermore, consider the implications for future revisions of methods of measuring deflators.

JEL Classification Code: E01, I00, L74, L80
Keywords: Service Sector, Deflators, Real Value Added, Total Factor Productivity, Construction, Commerce, Education, Medical Service

Welfare Assessment of Entry of New Retail Formats and Deregulation for Restriction on Large Retail Scale Stores in Japan

Keiichiro HONDA, Toshiyuki MATSUURA, Takeshi MIZUTA

This study attempts to measure the welfare gain caused by new retailer entries and the deregulation of entry restriction. In 1990s and 2000s, the retail sector in Japan experienced significant reallocation dynamics. Two retail formats have expanded their market share: one is specialty supermarket stores that expanded their market shares partially due to the deregulation of large-scale stores, and the other is convenience stores that take advantage of their distinctive service quality and efficient operation system. We estimate the consumer benefit by incorporating the differences in service quality as well as differences in price among retail formats and demonstrate that welfare improvements are primarily explained by changes in price and service quality.

JEL Classification Code：L13, L81, L51
Keywords：Competition, Welfare Analysis, Retail Industry, Entry Regulation

The Contribution of Quality and Product Variety to Retail Growth in Japan

Masahiro SATO, Taisuke KAMEDA, Shigeru SUGIHARA, Colin HOTTMAN

This paper examines the contribution of service quality to service sector output in Japan taking retail services as an example. Specifically, it examines how much of the variation in retail sales across retail firms is due to differences in the quality of services, including the product variety offered, and how the variation in real output of the retail sector would change if it were deflated by price indices incorporating differences in quality instead of conventional price indices. We address the methodological difficulties in quantitatively evaluating service quality by using a massive dataset of barcode-level purchase records providing detailed information about purchases at individual retail firms, constructing a structural model of consumer demand for the real output of each retail firm, and introducing a benchmark product to normalize the quality parameters. This approach enables us to assess the contribution of service quality independently from product quality. Our results show that 57% of the variation in retail firms’ sales is attributable to differences in firm-level service quality and 26% to differences in product group variety. Estimates based on the conventional price index understate the real output of large firms by a quarter relative to small firms.

JEL Classification Code: L11, L13, L81
Keywords: Service Sector, Productivity, Product Variety, Structural Estimation

Agglomeration and Networking in Academic Research

Hiroki INOUE, Hiromi SAITO, Shigeru SUGIHARA, Shigeru HIROTA, Taisuke KAMEDA

Research activity is crucial to economic growth. To effectively enhance science research, this paper investigates the mechanisms of producing high quality research by analyzing the determinants of research outcomes. These analyzed determinants include externalities, such as the benefits of agglomeration and network effects; the effects of the structure and nature of research networks, such as density and variety; and attributes of coauthors, such as publishing a certain quantity of papers or quality papers. This paper also contributes to the measurement of the quality of academic research by introducing several new indicators of quality. Our results show that agglomeration and the network effect are observed with diminishing effects, as the range of externalities goes farther away from a researcher, the exception being the collaboration with foreign researchers. Concerning network characteristics, linkage with prolific coauthors or organizers significantly contributes to a quantitative increase in research outcomes, but very little to qualitative outcomes. As such, it is the linkage with quality coauthors that enhance research quality.

JEL Classification Code: I23, O39
Keywords: Research Productivity, Research Quality, Externality, Network Characteristics