[ReadMyMind]

Question for all the arm-chair economists...

What's the difference between increasing bang-for-buck (seen most dramatically in the computer industry over the last 20 years) and deflation?

Is there a real difference or is it a point of view?

[oldcomputerguy]

Productivity is an efficiency phenomenon and
deflation is a monetary phenomenon, the destruction
of capital.

[IncPen]

What's the difference between increasing bang-for-buck (seen most dramatically in the computer industry over the last 20 years) and deflation?

I think what you're referring to can be explained by volume units of sale, ie. computers are cheaper but they sell more of them, and thus can increase margins.

The kicker is when a cost (like labor) is outsourced or sent offshore.

[babble-on]

There have been a lot of studies on this question. The Boskin Commission made an estimate of how much CPI is overstated due to the 'more bang for the buck' principal you describe. For example, if a Red Delicious apple was in the CPI in 1970 and today, you are basically talking about the same apple. It makes sense to compare the prices of the two products to see whether apples have gotten more expensive, and by how much. But if a color television was in the CPI basket in 1970 and is still in the basket in 2002, it still doesn't tell you too much to compare the prices, because the 2002 television is a very different animal than the old one was. It may be three times more expensive, but how can you calculate how much better it is in terms of picture quality, sound quality, cable readiness, remote control and so on? The Boskin Commission actually put a number on this product enhancement creep, but I can't remember what it was.

[Stefan Stackhouse]

Inflation is a supply of money that is increasing relative to the supply of goods. Deflation is a supply of money that is decreasing relative to the supply of goods. The decline in cost of a particular good due to improved technology or productivity just leaves more money available to purchase other goods, but this can occur in either an inflationary or deflationary monetary environment.

Neither inflation nor deflation is really good -- a stable supply of money is best for any economy, because it enables economic decisions to be made efficiently without having to factor in guesses about where the money supply is going.