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EKPERDITURES
P re p a re d fo r
U.S. A R M S C O N T R O L A N D
D IS A R M A M E N T A G E N C Y
U.S. D E P A R T M E N T O F C O M M E R C E
Bureau of Economic Analysis
MEASURI NG
PRI CE
MI LI TARY
JUNE
CHANGES
OF
EXPENDI TURES
1975
Pr epar ed f or
U. S.
Ar ms Cont r ol
U. S.
and Di sar mament Agency
DEPARTMENT OF COMMERCE
BUREAU OF ECONOMI C ANALYSI S
F o r sa le b y t h e S u p e r in t e n d e n t o f D o c u m e n t s , U .S . G o v e r n m e n t P r in tin g O ffice
W a s h in g to n , D .C . 20402 - P r ic e $5.50
S to ck N u m b e r 0 0 3 - 0 2 4 - 0 1 1 4 2 - 5
m
PREFACE
Thi s st udy i s par t of cont i nui ng r esear ch on t he nat i onal i ncome
and pr oduct account s pr epar ed by t he Bur eau of Economi c Anal ysi s ( BEA) ,
U. S. Depar t ment of Commer ce.
Thi s r epor t was pr epar ed f or , and wi t h
t he f i nanci al suppor t of , t he U. S. Ar ms Cont r ol and Di sar mament Agency
( ACDA) .
The j udgment s expr es sed her e do not necess ar i l y r ef l ect t hose
of t he sponsor i ng agency.
The document pr esent s t heor et i cal concept s
and f or mul at i ons of pr i ce i ndexi ng, r evi ews f or ei gn and U. S. mi l i t ar y
pr i ce i ndexi ng pr act i ces, and pr oposes i mpr ovement s t o t he meas ur ement
of pr i ce changes of mi l i t ar y expendi t ur es.
The i nt ent of t he c onc l u
si ons and r ecommendat i ons i s t o el i ci t di sc us si on and act i on by par t i es
i nt er est ed i n i mpr ovi ng t hi s t ype of meas ur ement i n t he f ut ur e.
Ful l cr edi t f or t hi s wor k must be ext ended t o t he pr i nci pal aut hor ,
Al l an D. Sear l e, cons ul t ant t o BEA, f or mer l y Chi ef of t he Di vi si on of
I ndust r i al Pr i ces and Pr i ce I ndexes of t he Bur eau of Labor St at i st i cs.
Thr ough hi s ef f or t s, a l ar ge amount of r esear ch and domument at i on was
accompl i shed i n a shor t per i od of t i me.
Wi t hi n BEA, t he pr oj ect was
per f or med under t he over al l admi ni st r at i ve and t echni cal di r ect i on of
Char l es A. Wai t e, Chi ef of t he Gover nment Di vi si on.
Wal t er H. Bennet t ,
St af f Ec onomi st i n t he di vi si on, managed t he pr oj ect and pr ovi ded r e
sear ch and document at i on.
Cont r i but i ons wer e al so made by BEA st af f
member s Lawr ence R. Ful l er t on and Paul F. Wal ker .
Cr edi t f or t he i ni t i at i on of t hi s pr oj ect i s due l ar gel y t o Rut h
L. Si var d, f or mer l y of ACDA.
Dani el Gal 1i k of t hat agency was t he
pr oj ect moni t or .
The pr oj ect r ecei v ed val uabl e gui dance on t he basi c
i ssues and pr obl ems at a meet i ng of exper t s.
Thei r names and t he i ssues
di scussed ar e f ound i n Appendi x I - A.
Numer ous U. S. and i nt er nat i onal
or gani zat i ons ci t ed i n t he t ext al so pr ovi ded essent i al i nf or mat i on.
V
SUMMARY
A.
I nt r oduct i on
Thi s r epor t was pr epar ed by t he Gover nment Di vi si on,
Economi c Anal ys i s ( BEA)
t r act wi t h t he U. S.
of t he U. S.
Ar ms Cont r ol
has an ac t i ve i nt er est
Depar t ment
Bur eau of
of Commer ce,
under c on
and Di sar mament Agency ( ACDA) .
ACDA
i n t he st at e of t he ar t f or cons t ant - pr i ce
measur es of mi l i t ar y expendi t ur es t hr oughout
t he wor l d.
Capabi l i t i es
f or def l at i ng mi l i t ar y ex pendi t ur e dat a have an i mpor t ant bear i ng on
abi l i t y t o ( 1) moni t or r eal
i n t he U. S.
changes i n t he si ze of def ens e sect or s
and f or ei gn count r i es,
( 2) eval uat e t he i mpact of mi l i
t ar y spendi ng on t he domest i c economi es of t hose count r i es,
make i nt er nat i onal
Thi s r epor t
compar i sons of def ens e ef f or t s.
f ocuses on t he need f or i mpr ovement
of def l at i ng def ense expendi t ur es,
To t hi s end,
( 1)
t he cur r ent
var i ous t heor et i cal
bot h i n t he U. S.
i s eval uat ed cr i t i cal l y,
( 2)
f or mul at i ons of pr i ce i ndexes ar e r evi ewed,
and met hodol ogi cal
segment s of t he U. S.
i n t he met hods
i n t he Uni t ed St at es and abr oad.
" st at e of t he ar t " ,
and i n sel ect ed f or ei gn count r i es,
ot her concept ual
and ( 3)
gr oundwor k i s pr ovi ded,
Depar t ment of Def ense ( DOD)
f or t he pur pose of appl yi ng t hese gener al
and
and ( 3)
budget ar e cons i der ed
pr i nci pl es t o speci f i c
def l at i on pr obl ems .
Thr oughout
t i cal
t hi s r epor t ,
an ef f or t
i s made t o consi der i n pr ac
t er ms t he ki nds of def ense ex pendi t ur e dat a and meas ur ement
t echni ques t hat ar e cur r ent l y avai l abl e i n t he Uni t ed St at es.
Fi nal
r ecommendat i ons ar e made wi t h t hese consi der at i ons i n mi nd;
VI
def l at i on met hods t hat woul d be chosen f r om a pur el y concept ual
poi nt must
be ( at
l east t empor ar i l y)
st and
di scar ded i n f avor of met hods t hat
coul d be adopt ed t oday under cur r ent meas ur ement const r ai nt s.
For exampl e,
t he r epor t
exami nes t he f eas i bi l i t y of const r uct i ng
pr i ce i ndexes f or t he out put of gover nment .
mi l i t ar y ( DOD)
out put ar e r evi ewed,
of meas ur i ng nat i onal
but
t he l ack of an obj ect i ve means
secur i t y l eads t o t he concl usi on t hat meas ur ement
of pr oduct i on of t he mi l i t ar y est abl i s hment
pr act i cal .
For r easons spel l ed out
meas ur e must be set asi de.
Any pr i ce meas ur ement
Var i ous def i ni t i ons of
or pr i ci ng out put
i s not
i n t he body of t he r epor t ,
( Chapt er
I I , A. 2. d.
Cost
t hi s
of Li vi ng Appr oach)
pr ogr am whi c h may devel op shoul d devot e i t s r e
sour ces mor e pr oduc t i vel y t o ot her aspect s of pr i ce measur ement .
Because
measur es of mi l i t ar y out put and compar abl e def l at or s ar e not f easi bl e
gi ven t he cur r ent st at e of t he ar t ,
i t f ol l ows t hat devel opment
of
i mpl i c i t val ue- added def l at or s and cons t ant - dol l ar val ue added must
al so be f or egone.
The quest i on of adj ust ment
al so r ecei ves at t ent i on.
of
pr i ce i ndexes f or change i n qual i t y
The " cor r ect " def i ni t i on i s dependent
on t he
concept desi r ed and bot h pr oduc t i on- or i ent ed and cons umpt i on- or i ent ed
measur es ar e di scussed as t o pur pose and f easi bi l i t y.
cept s ar e of use,
Whi l e bot h c on
t he r epor t comes down on t he si de of pr oduct i on-
or i ent ed ( r esour ce use) measur es f or r easons gi ven i n det ai l
sect i ons of t he r epor t .
( Chapt er
III,
C.
Qual i t y Change)
i n l at er
I t f ol l ows
t hat qual i t y adj ust ment s woul d be made ac cor di ng t o t he ext r a r esour ce
i nput
( added cost )
of t he i mpr ovement
( or decr eased cost
i n case of
det er i or at i on)
se.
r at her t han based on a meas ur e of per f or mance change per
I mpr ovement s whi ch ar e cost l ess ( r at her r ar e i n pr act i ce)
i gnor ed;
i . e. ,
pr i ces woul d not be adj ust ed,
woul d be
but t r eat ed as compar abl e
over t i me.
B.
Concept s and For mul at i ons
1.
Concept s
I ni t i al l y,
t hi s r epor t
and pr i ce def l at i on i n gener al .
addr esses t he subj ec t of pr i ce i ndexes
An i nput pr i ce i ndex , whi ch measur es
changes i n t he pr i ce of uni t s pur chased by a pr oducer
r el at i on t o an out put
of t he out put of
Measur es)
i s di sc ussed i n
i ndex , whi c h measur es changes i n t he uni t pr i ce
t hat pr oducer .
( Chapt er I I , A. l .
I nput vs.
Out put
Thi s r el at i onshi p i s expl or ed i n a di scus si on of t he ef f ect s
and meas ur ement of changes i n pr oduc t i vi t y of f act or i nput s over t i me.
( Chapt er
Chapt er
II,
I V,
D.
C.
Li nkage Bet ween I ndexes of
I nput and Out put and
Need f or Pr oduc t i vi t y Measur es i n Pr i ci ng)
I t i s essent i al ,
i n choosi ng bet ween t hese basi c f or ms and i n
cons t r uct i ng and i n usi ng t he pr i ce i ndex,
t he pr i ce i ndexes,
t o i nsur e t hat t he val ues,
and t he der i ved quant i t y measur es ar e consi s t ent
as t o , ur pose and scope.
Thi s need f or cons i s t enc y t akes on speci al
r el evance when t he out put
pr i ce of a suppl i er of a good and t he pr i ce
pai d by a pur chaser di f f er s because of t r anspor t at i on char ges,
t axes,
of
i nst al l at i on char ges,
t he good pur chased must
and di scount s.
t he uni t
be def i ned and i t s pr i ce det er mi ned,
necess ar i l y ac cor di ng t o convent i onal
pur pose i n const r uct i ng t he i ndex.
Measur es and Chapt er
I n t hi s case,
I I I , A.
pr act i ce,
( Chapt er
not
but ac cor di ng t o t he
I I , A. l .
Meani ng of Pr i ce)
exci se
I nput vs.
Out put
vi n
Fi nal l y,
sever al
t ypes of i nput
pr i ce i ndexes ar e di f f er ent i at ed:
t he st andar d i ndex , i n whi ch a " mar ket basket "
i s r epr i ced per i odi cal l y;
cost pr i ce i ndex es , i n whi ch subst i t ut i ons
ar e made i n t he i ndex mar k et
mat er i al
of goods and ser vi ces
basket
t o per mi t r epl acement
f or anot her as t echnol ogy changes;
of one
a modi f i ed cost
pr i ce
I ndex i n whi ch subst i t ut i ons ar e made t hat ar e cons i s t ent wi t h
cont r i but i on t o out put
( f or exampl e,
and t he so- cal l ed cost of
wal l boar d f or l at h and pl ast er ) ;
l i vi ng appr oach,
i n whi c h t he subst i t ut i ons
woul d be equat ed on t he basi s of sat i sf ac t i on or t he abi l i t y t o achi eve
a gi ven def ens e goal .
2.
( Chapt er I I ,
A. 2 . Types of
I nput
Pr i ce I ndexes)
For mul at i ons
Var i ous f or mul ae f or pr i ce i ndexes ar e r evi ewed i n gener al
t er ms,
and t he appr opr i at eness of each f or def l at i on of def ense-
r el at ed ex pendi t ur es f or goods and ser vi ces i s expl or ed.
B.
I ndex For mul at i ons)
i ndexes,
as wel l
I n addi t i on,
Paasche,
Edgewor t h,
and Fi sher
as t he Gear y- Khami s and I kl £ f or mul at i ons ar e i ncl uded.
t he ef f ect of changi ng pr oduct - mi x on t he di f f er ent
f or ms i s r evi ewed,
out put
The Laspeyr es,
( Chapt er I I ,
i ndex
enabl i ng t he f or mul at i on of i ndexes of pr oducer
pr i ces as a f unct i on of
i ndexes of f act or i nput s and pr oduct i on
r el at i onshi ps.
C.
Pr i ci ng i n Gener al
1.
Quant i t y Measur e
Pr i ces can onl y be det er mi ned i f t her e i s a meani ngf ul
meas ur abl e def i ni t i on of quant i t y - what
di scusses sever al
i t ur es.
i s t o be pr i c ed?
and
The r epor t
possi bl e def i ni t i ons f or quant i f yi ng def ens e expend-
ix
a.
Nat i onal
Secur i t y
Nat i onal
secur i t y may be t hought of as t he out put of
t he def ens e est abl i shment ,
and at l east concept ual l y,
pr i ce coul d be
def i ned i n t er ms of uni t s of secur i t y per dol l ar expended.
meas ur e i s i mpr act i cal
because of t he di f f i c ul t y i n def i ni ng and meas
ur i ng secur i t y obj ect i vel y.
Secur i t y var i es not onl y di r ect l y wi t h a
nat i on' s own expendi t ur es i n t he def ens e sect or ,
but
i ncr eased ef f ect i veness of an adver sar y' s ar ms.
( Chapt er
Nat i onal
i nver sel y wi t h
I I I , A. l .
Secur i t y)
b.
Resul t s f r om a Speci f i c Pur chase
Thi s def i ni t i on deal s wi t h t he payment
uni t of obj ect i v e ( enemy capabi l i t y hel d cons t ant
exampl e,
Thi s
per speci f i ed
or i gnor ed) ,
f or
t he cost of dest r oyi ng a speci f i c t ar get or cl ear i ng a spe
ci f i ed amount and t ype of t er r ai n.
f easi bl e,
but
Thi s measur e i s not pr esent l y
i t coul d become so i f pr esent pr oduc t i vi t y meas ur es ar e
devel oped f ur t her .
( Chapt er I I I ,
A. 2.
Speci f i c Resul t s f r om a Speci f i c
Pur pose)
c.
I nput s t o Mi l i t ar y Pur chases
Thi s def i ni t i on r equi r es onl y a cl ear concept
t i t y f or goods pur chased.
speci f i cat i on,
of quan
Goods and ser vi ces woul d be def i ned by
dr awn f r om mi l i t ar y pur chasi ng exper i ence.
Changes i n
t he nat ur e of i nput s woul d be handl ed as qual i t y change adj ust ment s.
Thi s i s t he i ndex conc ept
r ecommended as t he basi c mi l i t ar y pr i ce i ndex,
upon whi ch wor k may begi n wi t h speci f i c at i on and cost dat a cur r ent l y
avai l abl e.
( Ei t her t he st andar d i ndex or one of
may be adopt ed.
i t s modi f i cat i ons
The so cal l ed cost - of - l i vi ng var i ant
i s not cur r ent l y
X
Thi s r epor t
f easi bl e. )
st r esses t he need f or car ef ul
cat i on and expl or es t he pr act i cal
A. 3.
I nput s a n d B.
2.
pr oduct
s pec i f i
pr obl ems t hat may ar i se.
( Chapt er I I I ,
Speci f i cat i ons)
Qual i t y Change
The met hodol ogy empl oyed f or adj ust i ng a pr i ce i ndex t o ex
cl ude pr i ce changes t hat r esul t
wi t h t he f undament al
mends t hat ,
f r om qual i t y changes must
pur pose of t he i ndex i t sel f .
when t he i nput
pr i ce i ndex i s adopt ed,
be consi s t ent
Thi s r epor t r ec om
qual i t y change i n
def ens e pur chases shoul d be j udged on t he basi s of whet her or not
change cont r i but es t o mi l i t ar y goal s r at her t han t o est het i c,
or nonmi l i t ar y ai ms.
( Chapt er
III,
C. l .
III,
C. 5. c.
Chapt er
III,
C. 6 . Rel evance t o Mi l i t ar y Pr i ci ng)
t i on,
r at her
i ndi vi dual
Two Appr oaches t o Qual i t y Change;
Chapt er
Legal l y Requi r ed Change i n Speci f i cat i ons;
be measur ed by t he ext r a cost
t he
and
The adj ust ment
shoul d
( or l ower c os t ) of t he changed spec i f i c a
t han by t he change i n per f or mance i t sel f .
( Chapt er
III,
C. 2 . Rat i onal e f or t he Two Appr oaches)
The di sc us si on of t he meas ur ement
wi t h a r evi ew of t he ways t hat
of qual i t y change cont i nues
speci f i c pr obl ems have been handl ed i n
t he cons t r uc t i on of pr i ce i ndexes t hat ar e cur r ent l y av ai l abl e f or t he
ci vi l i an sect or .
ment s)
( Chapt er
speci al
C. 9.
Some Met hodol ogy on Qual i t y Adj us t
Speci f i c r ef er enc e i s made t o t he ki nds of pr obl ems t hat wi l l
ar i s e i n t he ef f or t
( Chapt er
III,
III,
C. 9. g.
t o meas ur e mi l i t ar y - pr oduc t
Exampl es of
I nt er est
pr i ce changes.
i n Mi l i t ar y Pr i ci ng)
Some
t opi cs i ncl uded ar e f or ced subst i t ut i ons of i nput s and subs t i
t ut i ons r el at ed t o envi r onment al
necessi t i es.
Legal l y Requi r ed Change i n Speci f i cat i ons)
( Chapt er
III,
C. 5. c.
XT
3.
Techni cal
Pr obl ems
Some speci al
pr obl ems ar e di sc us sed as t hey r el at e t o t he
meas ur ement of mi l i t ar y pr i ce change:
t he i nt r oduct i on of new pr oduct s,
t i mi ng of pr i ci ng ( especi al l y when t he pr oduc t i on cycl e f or a mi l i t ar y
good i s l ong) ,
char ges,
l ong- t er m cont r act s,
i nvent or y changes,
speci al
or der s,
t r anspor t at i on
and i mput ed pr i ce movement
f or goods not
i ncl uded among t hose ac t ual l y sampl ed i n t he i ndexi ng ef f or t .
III,
D.
Speci al
Meas ur ement
D.
Pr oduc t i vi t y and Pr i ce I ndexes
Pr obl ems)
The l i nk bet ween pr oducer ' s i nput pr i ce and out put
r est at ed and expr essed as a f or mul a.
pr i ce i s
Thi s di sc us si on ext ends t he not a
t i on i nt r oduced i n t he sect i on on i ndex f or mul at i on.
f or mul at i ons of pr oduc t i vi t y change ar e di scussed.
Gener al
( Chapt er
Var i ous r el evant
( Chapt er
I V,
B.
For mul at i on)
Pr oduc t i vi t y measur es ar e r equi r ed i n t he const r uct i on of mi l i t ar y
pr i ce i ndexes at t wo l evel s:
ment
( 1 ) f or comput i ng t he r ecommended gov er n
i nput pr i ce i ndex f r om suppl i er ' s i nput pr i ce and pr oduc t i vi t y
change ( i f pur chase pr i ces ar e unav ai l abl e f or cer t ai n compl ex goods,
f or exampl e) ,
and ( 2 ) f or est i mat i ng t he change i n t he pr i ce of
ac compl i shi ng a speci f i c t ask.
For an i ndex i n t hi s f or m,
pr i ce i ndex woul d be modi f i ed by a pr oduc t i vi t y i ndex,
i t i es of t he mi l i t ar y es t abl i s hment
i t sel f .
t he i nput
cover i ng ac t i v
( Chapt er I V, C.
Need f or
Pr oduc t i vi t y Measur es i n Pr i ci ng)
Fi nal l y,
t he r epor t
expl or es t he av ai l abi l i t y of i nf or mat i on on
f act or pr oduc t i vi t y i n def ens e- r el at ed i ndust r i es and wi t hi n t he mi l i
t ar y sect or ;
( Chapt er I V,
D. Av ai l abi l i t y of Pr oduct i vi t y I nf or mat i on)
XI 1
i n par t i cul ar ,
i t exami nes i n det ai l
st udy on pr oduct i vi t y meas ur ement
t he new Feder al
now under way f or i t s l i kel y c ont r i
but i on t o t he devel opment of mi l i t ar y pr i ce i ndexes.
D. 6 . The Joi nt Meas ur ement
Fi nanci al
E.
Management
Syst ems Pr oj ect ;
I mpr ovement
i nt er agency
Pr ogr am;
( Chapt er I V,
E. Met hodol ogy of Joi nt
an d F.
Concl usi ons)
For ei gn Mi l i t ar y Pr i ce I ndexes
Speci f i c det ai l s on t he meas ur ement
of pr i ce changes of mi l i t ar y
ex pendi t ur es i n f or ei gn count r i es ar e di f f i c ul t
ar e usual l y unpubl i shed and ar e not
r eason
t o obt ai n because t hey
separ at el y compi l ed.
For t hi s
t he r epor t exami nes t he pr i ce i ndexes whi ch f or ei gn gover nment s
use t o def l at e gener al
gover nment
expendi t ur es.
Gener al
met hods of
def l at i on i n t he publ i c sect or ar e pr esent ed f or Aust r al i a,
Canada,
Japan,
( Chapt er V,
B.
Nor way,
Gener al
Sweden,
Swi t zer l and and t he Uni t ed Ki ngdom.
Met hods of Def l at i on i n t he Publ i c Sect or )
Speci f i c det ai l s
on t he def l at i on of mi l i t ar y expendi t ur es ar e pr esent ed f or Bel gi um,
Canada,
I t al y,
Denmar k,
t he Feder al
t he Net her l ands,
Republ i c of Ger many,
Nor way,
Sweden,
Fi nl and,
Fr ance,
and t he Uni t ed Ki ngdom.
Recent
ef f or t s of t he Nor t h At l ant i c Tr eat y Or gani zat i on ar e descr i bed.
( Chapt er V, C.
Speci f i c Met hods of Def l at i on i n t he Mi l i t ar y Sect or )
Most f or ei gn count r i es def l at e mi l i t ar y expendi t ur es by f our mai n
gr oups:
( 1) compensat i on of empl oyees,
goods and ser vi ces,
( 2 ) cur r ent
( 3) gr oss f i xed capi t al
and ot her const r uct i on) ,
expendi t ur es on
f or mat i on ( l ess bui l di ngs
and ( 4) bui l di ngs and ot her const r uct i on.
Compensat i on of empl oyees i s def l at ed by ei t her a wei ght ed quant i t y
measur e t hat
uses empl oy ment dat a or a wage sal ar y " pr i ce"
i ndex.
The
xi i i
appl i c at i on of pr i ce i ndexes pr epar ed f or t he pr i vat e economy i s t he
pr i nci pal
way of def l at i ng expendi t ur es f or ot her goods and ser vi ces
i n t he mi l i t ar y sect or .
F.
Uni t ed St at es Mi l i t ar y Pr i ce I ndexes
Wor k i n t he Uni t ed St at es on mi l i t ar y pr i ce i ndexes i s cur r ent l y
under way on t wo br oad f r ont s.
Fi r st ,
many speci al
st udi es of
speci f i c
mi l i t ar y pr i ci ng pr obl ems have gr own out of a desi r e t o quant i f y t he
ef f ect s of i nf l at i on on pr oc ur ement cont r act s.
Second,
r ecent wor k has begun bot h wi t hi n and out si de t he Depar t
ment of Def ense ( DOD)
def l at or f or t ot al
on an ef f or t
t o devel op a mor e encompassi ng
def ens e expendi t ur es,
( a) The Bur eau of
Economi c
Anal ys i s pr epar ed a def l at or of def ense pur chases f or t hi s st udy by
i sol at i ng t he nat i onal
def ense por t i on of t ot al
have been r out i nel y def l at ed at BEA.
t hose f or def ens e agenci es as wel l
f unct i ons.
( Chapt er VI ,
B.
budget as wel l
def i ned.
t ot al
as t hose f or t he DOD' s mi l i t ar y
Def ense
( b) The DOD const r uct s a def l at or f or i t s
as one f or nat i onal
def ens e pur chases,
mor e br oadl y
Bot h of t hese def l at or s r el y heavi l y on BEA' s def l at or s f or
Feder al
I n addi t i on,
pur chases.
( c)
( Chapt er VI ,
C.
Depar t ment of Def ense' s I ndex)
t he Depar t ment of t he Ar my has pr epar ed i t s own def l at or
f or nonper sonnel
I ndex)
pur chases whi ch
Her e def ens e pur chases i ncl ude
Bur eau of Economi c Anal ysi s'
Def l at or a n d Appendi x VI - B)
t ot al
Feder al
expendi t ur es.
Fi nal l y,
Management and Budget
DOD def l at or s.
( Chapt er VI ,
E.
Depar t ment of Ar my s
def l at or s have been cons t r uct ed at t he Of f i ce of
f or t he ent i r e uni f i ed budget t hat empl oy t he
( Chapt er VI ,
D. Of f i ce of Management and Budget ' s Def l at or )
XIV
I n each of t hese cases,
def l at or s f or def ens e expendi t ur es ar e
der i ved i mpl i ci t l y as wei ght ed aver ages of car ef ul l y sel ect ed pr i ce
i ndexes f r om t he ci vi l i an sect or .
Many of t he r ecommendat i ons i n
t hi s r epor t cent er on t he need t o devel op def ense def l at or s t hat
r ef l ec t act ual
G-
def ens e pur chasi ng exper i ence.
Pr i ci ng t he U. S.
1•
Mi l i t ar y Budget
Need f or Rel evant Pr i ci ng
The a pr i or i
r easoni ng t hat pr i ce t r ends of pr oduct s sol d
■li l ci vi j i an mar ket s move t he same as t hose of
mi l i t ar y es t abl i shment
t hat ar e al most
shel f
i t ems) ,
i s haz ar dous .
pr oduct s pur chased by t he
Even f or t hose ci vi l i an pr oduct s
t he same as t hose pur chased by mi l i t ar y agenci es ( t he
t he t er ms of sal e,
vol ume di scount s,
t ol er ances,
and
ot her mar k et f act or s ar e so di f f er ent t hat pr i ci ng based on def ense
pur chasi ng ex per i ence i s es sent i al - - at
has been compl et ed.
ar e si gni f i cant ,
A.
l east unt i l
a per i od of
t est i ng
Wher e pur chases of mi l i t ar y i t ems f r om abr oad
speci al
di r ect
pr i ci ng may be war r ant ed.
( Chapt er VI I ,
Di r ect Pr i ci ng- - Needs and Possi bi l i t i es)
2.
I ndex Base and Wei ght s
The choi ce of a year f or t he i ndex base i s consi der ed t o be
one l ar gel y of conveni ence.
No mat t er what
base year
i s sel ect ed,
y ear - t o- year per cent age changes i n t he i ndex ar e unaf f ect ed.
pr ef er abl e,
VI I ,
B. l .
however ,
I ndex Base)
i s anot her mat t er ,
For t hi s r eason,
t o choose a y ear t hat
i s not
t oo at ypi cal .
t he
It is
( Chapt er
The wei ght - bas e, or per i od chosen f or t he wei ght s,
because t hi s choi ce af f ect s t he per cent age changes.
i t i s advi sabl e t o sel ect a t i me per i od wi t h a somewhat
XV
t ypi cal
r el at i ve ex pendi t ur e pat t er n,
al t hough t hi s choi ce can be modi
f i ed i n f avor of a year when a gr eat amount
avai l abl e.
( Chapt er VI I ,
B. 2.
The gr eat er t he det ai l
Wei ght
Base)
avai l abl e,
pr esent i ng a var i et y of i ndexes.
of det ai l ed val ue dat a ar e
t he easi er t he t ask becomes of
These can be const r uct ed accor di ng
t o a number of st r uct ur es and f or numer ous i nt er medi at e l evel s of
det ai l
bet ween t he i ndi vi dual
( Chapt er VI I ,
B. 3. a.
pr oduct
ser i es and t he t ot al
Wei ght s and St r uct ur e)
ser ves a second pur pose:
i ndex.
A det ai l ed wei ght
st r uct ur e
i t pr ovi des t he basi s f or sel ect i ng t he sampl e
of pr oduct s and ser vi ces t o be i ncl uded i n t he cons t r uct i on of t he i ndex.
Because of t he basi c pr i ci ng as s umpt i on— t hat r el at ed goods ( ser vi ces)
ar e mor e l i kel y t o move t oget her i n pr i ce t han ar e phys i c al l y unr el at ed
goods ( ser vi ces)
i n t he same pr ogr am c at egor y— t he basi c wei ght
st r uc
t ur e shoul d be based on a commodi t y r at her t han an act i vi t y cl assi f i cat i on.
Thi s means t hat
t he obj ect cl ass cat egor i es of t he def ense budget shoul d
be t he basi c cl as si f i cat i on st r uct ur e,
deal
wi t h pr oduc t gr oupi ngs.
because t hese cl as si f i cat i ons
Once t hese i ndexes ar e obt ai ned,
t hey
can be r egr ouped t o ac t i vi t y cl as si f i cat i ons as desi r ed.
3.
Samp! i ng
The mi l i t ar y pr i ce i ndex pr ogr am wi l l
l evel s of sampl i ng:
descr i pt i ons ) ,
goods and ser vi ces,
speci f i cat i ons ( det ai l ed
and r epor t er s ( sel l er s or cont r act or s) .
pr obabi l i t y sampl es ar e hi ghl y desi r abl e,
of t he amount
be concer ned wi t h t hr ee
but not essent i al .
of i nf or mat i on av ai l abl e f r om t he U. S.
sampl i ng shoul d pose no gr eat
pr obl ems.
Sc i ent i f i c
I n vi ew
def ens e agenci es,
The sampl i ng f r ame,
l i ke t he
xv i
wei ght
di agr am,
cl ass l i nes.
4.
shoul d be dr awn f r om st r at a or gani zed al ong commodi t y-
( Chapt er VI I ,
C.
Sampl i ng]
St r uct ur e
Once a basi c pr i ce i ndex ser i es wi t h a det ai l ed wei ght i ng
st r uct ur e has been der i ved,
t he wei ght s may be r eor gani zed and r e
gr ouped i n a var i et y of ways wi t h onl y some addi t i onal
t he wei ght s may be or gani zed al ong appr opr i at i on,
ac t i vi t y l i nes ( or combi nat i ons of t hese)
def l at or s may be cal cul at ed.
5.
obj ect cl ass,
and new,
( Chapt er VI I ,
D.
Thus,
or
i nt er medi at e- l evel
St r uct ur e)
The Budget Cat egor i es
Wi t h t he ai m of sugges t i ng concr et e sol ut i ons,
met hods,
ef f or t .
t he concept s,
and pr i nci pl es devel oped i n t hi s r epor t ar e appl i ed t o spe
ci f i c pr i ci ng pr obl ems i n t he U. S.
mi l i t ar y budget .
Fol l owi ng i s an
out l i ne of t he t opi cs cover ed.
a*
Ac t i ve and Ret i r ed Mi l i t ar y Per sonnel
A uni t of
l abor must
pr i ce can be const r uct ed.
of an i ndi vi dual
be def i ned bef or e an i ndex of i t s
Labor may be t hought
of as ( 1) t he ser vi ce
wi t h a speci f i ed educat i on and wor k exper i ence,
or
( 2 ) t he ser vi ce an empl oyee pr ovi des i n per f or mi ng a speci f i c t ask at
a par t i c ul ar l evel
sheet ) .
of ski l l
( Chapt er VI I ,
E. l .
and r esponsi bi l i t y ( as descr i bed i n a j ob
Def i ni t i ons- - Al t er nat i v e Measur es)
The use of educat i on and exper i ence t o def i ne l abor uni t s seems
t o i mpl y t hat wages ar e pai d f or " pot ent i al " t hat
t o be cor r el at ed wi t h per f or manc e on t he j ob.
because t he " wage bar gai n"
i s mer el y assumed
For t hi s r eason and
i s ac t ual l y made on t he basi s of t he j ob
XVI 1
t o be done,
t he second appr oach i s r ec ommended.
Basi c Pr i ci ng Uni t )
t he l ong r un,
( Chapt er VI I ,
E. 2.
Ther e i s a poss i bi l i t y of upwar d gr ade cr eep over
however ,
so t hat an adj ust ment may be necessar y t o cor r ec t
f or downwar d bi as i n t he pr i ce i ndex i f t he dut i es of a pr es ent j ob
or r ank ar e t hose of a l ower gr ade j ob or r ank at some t i me i n t he past .
I n- gr ade or wi t hi n- r ank pay i ncr eases may be vi ewed as pr i ce i n
cr eases i f t hey ar e gi ven t o ent i ce new empl oyees,
i n a t i ght
l abor mar ket ,
out ext r a benef i t
t o hol d empl oyees
or t o r ewar d empl oyees f or l ong ser vi ce ( wi t h
t o t he empl oyer ) .
( Chapt er VI I ,
E. 4.
St eps Wi t hi n Gr ade
or Rank)
( 1)
Qual i t y Change and Def ense Goal s
Wi t h t he conver si on f r om a cons cr i pt
ar med f or ce,
quest i ons have ar i sen concer ni ng t he def l at i on of mi l i t ar y
manpower cost s.
Do t hey,
t o a vol unt eer
Do r ecent pay r ai ses const i t ut e t r ue pr i ce i ncr eases?
i nst ead,
r epr es ent an added expense f or addi t i onal
t he def ense es t abl i shment ?
Or i s some of each i nvol ved?
benef i t
to
Thes e quest i ons
shoul d be anal yzed i n t he cont ex t of t he concept s and pr i nci pl es dev el
oped t houghout
t hi s r epor t :
t he conver si on t o a vol unt eer f or ce r epr e
sent s a qual i t y change onl y, t o t he ex t ent t hat
i t enhances ( or decr eases)
t he abi l i t y of t he mi l i t ar y es t abl i s hment t o per f or m i t s mi ssi on.
qual i t y adj ust ment woul d be measur ed
si r ed mi l i t ar y - r el at ed goal .
soci et y at
by cost of br i ngi ng about
I t may be t hat
i ndi vi dual
Any
t he de
sol di er s or
l ar ge may be benef i t ed t hr ough el i mi nat i on of dr af t
pr essur e
or poss i bl y har med t hr ough excess i v e pr of essi onal i zat i on or pol i t i zat i on of t he ar med ser vi ces,
but t hese cons i der at i ons ar e onl y r el evant
x v m
f r om t he poi nt of vi ew of t he mi l i t ar y ( and t he pr i ce i ndex)
ex t ent
t hat t hey af f ect
est abl i shed goal s.
exampl e,
t o t he
t he abi l i t y of t he ser vi ces t o ac compl i sh t hei r
Some ef f ect s may be mi xed:
gr eat er mor al e,
may be r egar ded as a qual i t y i mpr ovement
f or
i f i t l eads t o mor e
ef f ect i v e manpower or i ncr eases r eenl i st ment r at es or l ower s t r ai ni ng
cost s.
I ncr eased i ndi vi dual
qual i t y i mpr ovement .
happi ness shoul d not be r egar ded as a
( Chapt er VI I ,
E. 7. a.
The Dr af t
vs.
t he Vol unt eer
Mi l i t ar y Ser vi ce)
St udi es now under way shoul d enabl e anal yst s t o eval uat e t he degr ee
t o whi ch t he conver si on t o a vol unt eer f or ce has r epr esent ed a qual i t y
change.
Unt i l
—
( Chapt er VI I ,
E. 7. b.
One Ev al uat i on of t he Vol unt eer Ar my)
such an ev al uat i on can be made,
however ,
t he mi l i t ar y pay r ai se
t *1e vol unt eer f or ce shoul d be r egar ded as a t r ue pr i ce i nc r eas e,
ex cept
t o t he ext ent
t o whi c h j ob dut i es have been modi f i ed.
ov er st at ement or under s t at ement
i s consi der ed l ess har mf ul
The pos-
of t he pr i ce r i se i n t hi s appr oach
t han t he l i kel y er r or whi ch woul d come f r om
pr emat ur e adopt i on of qual i t y change adj ust ment s f or benef i t s t hat ar e
st i l l
l ar gel y pot ent i al .
Some i nnovat i ons may t ur n out
t o be det er i
or at i ons r at her t han i mpr ovement s.
( 2)
Ret i r ed Mi l i t ar y Per sonnel
The not i on of def l at i ng r et i r ement pay by a pr i ce-
of - r et i r ement
i ndex i s conc ept ual l y unsound.
t he mi l i t ar y cannot
pay mi ght
The " good" pur chased by
be meani ngf ul l y quant i f i ed.
I nst ead,
r et i r ement
be t r eat ed as par t of t he act i ve dut y wor k cont r act and t he
pr es ent val ue ( cal cul at ed act uar i l y) woul d be added t o t he ac t i ve dut y
xf x
( Chapt er VI I ,
sal ar y f or t he pur poses of def l at i on.
Mi l i t ar y Per sonnel )
E. 9. a.
Ret i r ed
Then qual i t y changes associ at ed wi t h i ncr eased
r et i r ement benef i t s woul d be j udged accor di ng t o t hei r cont r i but i on t o
def ense goal s.
( 3)
Ci vi l i an Per sonnel
I n pr i nci pl e,
ci vi l i an per sonnel
f l at ed t he same way as mi l i t ar y per sonnel
ment
cost s.
cost s may be de
Because t he gov er n
pays onl y a por t i on of ci vi l i an r et i r ement cost s,
t he gover nment cont r i but i on shoul d be i ncl uded.
Ci vi l
however ,
( Chapt er VI I ,
E. 9. b.
Ser v i c e Ret i r ees)
b.
Oper at i on and Mai nt enanc e
Oper at i on and mai nt enanc e expendi t ur es consi st
cl es l i kel y t o bear st r ong physi cal
count er par t s.
Mat er i al s,
r esembl anc es t o t hei r ci vi l i an
and Equi pment , t her e i s a speci al
t uni t y ( second onl y t o per sonnel )
of sampl es,
t i vel y st r ai ght f or war d,
( Chapt er VI I ,
f or exampl e,
F. 2.
spec i f i cat i ons,
but some concept ual
Suppl y Cl as si f i cat i on Codes.
pr obl ems may ar i se.
Suppl i es and Mat er i al s and Equi pment )
( 1 ) t he t r eat ment of pr i ce i ndexes when oi l
on i ndexes when oi l
of t he wor l d t o meet mi l i t ar y needs.
One pr obl em,
Thi s has t wo aspect s:
i s pur chased abov e t he
pr i ce t o at t ai n di pl omat i c or pol i t i cal
on ei t her ac count ar e not needed.
oppor
and pr i ce dat a woul d be r el a
concer ns t he pr i ci ng of oi l .
changi ng ef f ect
In
t o begi n i mmedi at el y wor k on a ser i es
of pr i ce i ndexes t hat ar e t i ed i nt o Feder al
Devel opment
of ar t i
The so- cal l ed shel f i t ems ar e i n t hi s cat egor y.
t he gr oup Suppl i es,
mar k et
onl y
obj ect i ves and ( 2 ) t he
i s pur chased f r om di f f er ent ar eas
Adj ust ment s t o t he r epor t ed pr i ce
I n t he f i r st aspect ,
pol i t i cal
XX
obj ect i v es ar e not r el at ed t o def ens e goal s ( t he ext r a benef i t does
not ac cr ue t o t he def ens e est abl i shment ) ;
i n t he second aspect ,
changi ng sour ces of suppl y shoul d be al l owed t o af f ect a buyer ' s
pr i ce i ndex.
For I r anspor t at i on of Thi ngs and of
def i ne speci f i c t ypi cal
The Rent ,
t r i ps.
Communi cat i ons,
par t i c ul ar pr obl ems.
Per sons speci f i cat i ons shoul d
Typi cal
and Ut i l i t i es gr oup shoul d pose no
f aci l i t i es can be sel ect ed,
char ges f ol l owed over a per i od of t i me.
Typi cal
ci f i ed as t o vol ume and t ype of ser vi ce,
can be used.
The gr oup Ot her Ser vi ces wi l l
ut i l i t y bi l l s,
pose t he gr eat est
becaus e of t he di f f i c ul t i es i n def i ni ng ser vi ce.
" Ot her Ser vi ces" )
si st i ng of
Even her e,
however ,
l abor and r epl ac ement
and r ent
spe
chal l enge,
mai nl y
( Chapt er VI I ,
F. l .
st andar d r epai r ser vi ces,
par t s,
can be def i ned.
c on
Speci f i cat i on
of aut omat i c dat a pr ocessi ng ser vi ces r equi r es some pr ecaut i ons t o
as sur e compar abi l i t y of ser vi ce measur es over t i me.
For medi cal
car e,
a st andar d ser vi ce may al so be def i ned,
c.
Pr ocur ement
Equi pment const i t ut es about
gat i ons i n t he pr oc ur ement appr opr i at i on.
and mat er i al s account
f or most
( Ot her ser vi ces,
of t he r emai nder . )
di f f i c ul t y char ac t er i ze t he ef f or t
ar ea,
60 per cent of di r ect
t o devel op pr i ce i ndexes i n t hi s
but t her e ar e t wo encour agi ng si gns:
di f f i c ul t
t o pr i ce,
suppl i es,
Chal l enge and
( 1) some i t ems t hat ar e
r oughl y compar abl e t o i t ems of t he ci vi l i an economy,
what
obl i
wi l l
be onl y s ome
( 2 ) ot her s ar e compl ex and nonhomogeneous ,
XXI
but dat a ar e av ai l abl e t o per mi t as sess ment of qual i t y change.
The
Depar t ment of Def ense has made a st ar t i n t hi s di r ect i on.
( 1)
Ai r c r af t
Ai r c r af t pr i ci ng has a backgr ound of exper i ment al
wor k.
Thi s has i nvol ved t he use of pr oxy i nput ser i es f r om t he Bur eau
of Labor St at i st i cs Whol es al e Pr i ce I ndex,
a poi nt
i n t i me,
t he pr i ce f or each t ype of f i xed- wi ng ai r c r af t
expr essed i n t er ms of wei ght and speed.
qual i t y change,
and i n anot her i nst ance at
To per mi t assess ment
is
of
t est i ng and ex per i ment at i on wi t h var i ous met hods of
adj ust ment f or speci f i c at i on change i s r ecommended,
such as pr i ci ng
a pr ot ot ype,
and est i mat i ng
usi ng hedoni c ( r egr essi on)
t echni ques,
t he cost of change or der s af t er eval uat i on by f i el d audi t or s.
( Chapt er VI I ,
G. 2.
( 2)
A Look at Some Pr oduc t s— Ai r cr af t )
Shi ps
Shi ps al so have been subj ect t o exper i ment al
pr i ci ng,
and some i nt er est i ng met hodol ogi es have been t r i ed.
t i on- f unct i on meas ur ement
has been at t empt ed as wel l
i nput i ndexes f or mat er i al s and l abor .
as t he use of
The val ue of such appr oaches
i s sever el y l i mi t ed by t he use of pr oxy i ndex ser i es.
i ndex,
now bei ng used i nt er nal l y i n t he Depar t ment
pr i ce dat a f or f i ni shed shi ps as i t s basi s.
i ndex,
as wel l
as t hat f or f i ni shed ai r cr af t ,
t han i ndexes based on mat er i al
Pr oduc
However ,
of t he Navy,
one
t akes
Pr i ce t r ends f or t hi s
ar e si gni f i c ant l y l ower
and l abor i nput s.
( Chapt er VI I ,
A Look at Some Pr oduc t s— Shi ps, a n d Appendi x VI I - A)
G. 2.
XXI 1
( 3)
Communi cat i ons and El ect r oni c Equi pment ,
Cont r ol
Vehi cl es,
Tact i cal
and Suppor t
Weapons .
Vehi c l es .
and Ammuni t i on
Thi s ar ea i s of var yi ng di f f i cul t y.
wi l l
Ammuni t i on
be most amenabl e t o st andar d pr i ci ng pr ocedur es.
Pr i nci pl es and
met hods used t o pr i ce mot or vehi cl es i n t he ci vi l i an sect or wi l l
appl i c abi l i t y t o t act i cal
and suppor t vehi cl es.
cess i ng equi pment may pr ove mor e di f f i cul t ,
t he cost of a model
( 4)
i nput
d*
pr obabl y pr esent
at
t he gr eat est obs t a
l east i ni t i al l y,
t o r esor t
to
pr i ci ng f or some mi ssi l es.
Resear ch,
Devel opment ,
The pr i nci pal
per sonnel
but at t empt s t o f ol l ow
Mi ssi l es
I t may be necessar y,
cont r act or s'
Aut omat i c dat a pr o
t hr ough a number of year s may pr ove successf ul .
Mi ssi l es wi l l
cl es of al l .
have
compensat i on,
Test ,
and Eval uat i on
cat egor i es under t hi s appr opr i at i on-
ot her ser vi ces ( t he l ar gest gr oup) ,
and equi p
ment — ar e l ar gel y cover ed i n di sc ussi ons of ot her appr opr i at i ons.
cause of t he gr eat
emphasi s pl aced on t he hi r i ng of hi ghl y t r ai ned,
speci al i zed per sonnel ,
however ,
r ecor ds of R&D pur chasi ng pr esent an
oppor t uni t y t o t est t he al t er nat i v e per sonnel
ear l i er
Be
pr i ce i ndex,
descr i bed
( pr i ce of ser vi ce of empl oyees wi t h def i ned educat i on and
t r ai ni ng) ,
as a check on t he mor e usual
j ob sheet measur es.
r epor t by t he Bur eau of Labor St at i st i cs f or t he Nat i onal
Foundat i on,
r eexami ned.
A 1968
Sci ence
cover i ng Ar my R&D l abor at or i es and t hei r cont r act or s,
( Chapt er VI I ,
H. l .
Per sonnel
Compensat i on)
is
The r ec ommen
dat i on as t o bot h t he need and f eas i bi l i t y of pr i ci ng f r om mi l i t ar y
xxi n
pur chasi ng exper i ence i s conf i r med as i s t he need t o wor k wi t h DOD
f i el d audi t or s ,
cont r act or s,
and even some subcont r act or s i n es t abl i s h
i ng r epor t i ng syst ems.
e.
Mi l i t ar y Cons t r uct i on
Met hods devel oped by t he Bur eau of t he Census i n c ons t r uc
t i ng pr i ce i ndexes f or si ngl e- f ami l y houses and f or apar t ment
bui l di ngs
ar e r ecommended.
Thes e
( Chapt er VI I ,
1. 2.
Some Av ai l abl e I ndexes)
br eakt hr oughs r epr es ent a depar t ur e f r om t he r el i ance on i nput
pr i ci ng
t hat gener al l y char act er i zes at t empt s t o devel op pr i ce i ndexes f or c on
st r uct i on.
si on)
Two pr i nci pal
appr oach,
met hods ar e pr oposed:
as i n Census Bur eau' s measur es,
over t i me of t he cost of a st andar d st r uct ur e.
woul d avoi d t he need ( l ar gel y unf i l l ed)
meas ur e t o i nput pr i ce t r ends.
i ndex,
( 1) t he hedoni c, ( r egr es
and ( 2) t he meas ur ement
Ei t her of t hese met hods
of appl yi ng a pr oduc t i vi t y
A t hi r d met hod woul d be an i nput
modi f i ed t o al l ow subst i t ut i ons of component s t hat
same pur pose as r epl ac ed i t ems,
f .
pr i ce
f ul f i l l
t he
such as t he use of modul ar uni t s,
Revol vi ng and Management
Funds
The t r eat ment of pur chases and " sal es" of t hese f unds
i s di scussed.
The st ock f unds,
i n par t i cul ar ,
hol d l ar ge i nvent or i es
of goods pur chased i n ear l i er year s and t hen " sol d"
pr i ces wi t hi n DOD as needed.
The r ecommendat i on i s ul t i mat el y, t o
t r eat t he pur chases of t hese f unds pr i ced at
appr opr i at e t r ansact i on f or t he i ndex.
t i me of pur c hase as t he
To avoi d dupl i c at i on,
wi t hi n DOD woul d be excl uded f r om t he wei ght s.
mi ght
be mor e pr act i cal
at admi ni st er ed
r esal e
For t he pr esent ,
it
t o i ncl ude t he pur chases of t he ser vi ces f r om
xx i v
t hese f unds i n t he wei ght s,
t o use pr i ces r ef l ec t i ng DOD pur chase
but
ex per i ence f r om t he out si de wor l d.
A var i ant woul d i ncl ude i nt er nal
pr i ces of DOD pr ogr ams f r om t he st ock pi l es.
Concl usi ons and Recommendat i ons
The r epor t conc l udes t hat ,
wi t h t he c ommi t ment of modest
f or t he Uni t ed St at es,
r esour ces,
- ( pur chase pr i ces pai d by gover nment )
i t i s f easi bl e
t o cons t r uc t an i nput pr i ce i ndex
f or def ens e ex pendi t ur es by usi ng
j j ur c has i ng dat a f r om DOD and def ens e agenci es.
Then,
r esear ch shoul d
■Le-...di r ec t ed t owar ds devel opi ng and adapt i ng measur es of pr oduc t i vi t y
so t hat a second def l at or ,
ment ,
woul d evol ve.
one cl oser t o def ens e out put
( Chapt er VI I I ,
The r ecommended i nput
pr i ce meas ur e
Concl usi ons and Recommendat i ons)
pr i ce i ndex woul d be usef ul
f or maki ng c om
par i sons wi t h si mi l ar l y cons t r uct ed ser i es f or ot her count r i es.
woul d not ,
by i t sel f ,
i ndi cat e cost
over r uns or ar eas of ei t her ef f i ci ent
or i nef f i ci ent use of def ens e r esour ces,
Besi des f aci l i t at i ng budget
f ul
pl anni ng,
i nf or mat i on f or t he nat i onal
It
but
i t mi ght pr ovi de cl ues.
t he det ai l
woul d cont r i but e us e
i ncome and pr oduct account s.
addi t i on t o t he l i st of speci f i c r ecommendat i ons i n t he r epor t ,
In
some
br oader r ecommendat i ons may be suggest ed:
*
i Pj mnt ment t o Pr i c i ng.
i n t hi s ef f or t
A pr i nci pal
i s commi t ment
DOD and def ense agenci es,
*
Commencement
r equi r ement f or success
by t he Gover nment ,
es peci al l y
t o t he pr oj ect .
of Wor k on a Pur chase Pr i ce I ndex .
Thi s i s
f easi bl e and shoul d use mi l i t ar y pur chase pr i ce exper i ence.
*
--er manenT Pr i c i ng St af f .
vi de cont i nui t y.
Thi s shoul d be est abl i s hed t o pr o
XXV
•
I nt er agency Ef f or t .
pr ovi ded at
Coor di nat i on and suppor t
t he wor k i ng l evel
shoul d be
by ex per i enced agenci es.
xxv i i
TABLE OF CONTENTS
PAGE
P RE F A CE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SUMMARY
I.
II.
III.
I V.
......................................................
I NTRODUCTI ON
ii i
v
.........................................
1
A.
Backgr ound
.......................................
1
B.
P r o b l e m. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
C.
Obj ect i ves
.......................................
2
D.
Scope of Wo r k . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
E.
St r uct ur e of t he R e p o r t . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
CONCEPTS AND FORMULATI ONS
.............................
. ................
4
A.
Some Concept s
B.
I ndex For mul at i ons
..............................
13
C.
Pr oduct Mi x Changes
..............................
20
D.
Li nkage Bet ween I ndexes of
E.
Recommended I ndex For ms
PRI CI NG I N GENERAL
I nput and Out put
4
. . .
21
...........................
30
...................................
33
.................................
33
A.
Meani ng of Pr i ce
B.
Speci f i c at i ons
...................................
37
C.
Qual i t y Change
...................................
41
D.
Speci al
Meas ur ement Pr obl ems
PRODUCTI VI TY AND PRI CEI NDEXES
A.
Backgr ound
B.
Gener al
......................
73
.........................
88
................................... * '
For mul at i on
...............................
9°
xx vi i i
TABLE OF CONTENTS
( cont i nued)
PAGE
C.
Need f or Pr oduc t i vi t y Measur e
D.
Av ai l abi l i t y of Pr oduc t i vi t y I nf or mat i on
E.
Met hodol ogy of Joi nt
I mpr ovement Pr ogr am
F.
V.
VI .
VI I .
i nP r i c i n g . . . . . . . . . .
93
.........
94
Fi nanci al Management
...............................
98
Co n c l u s i o n s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FOREI GN MI LI TARY PRI CE I NDEXES
112
.......................
A.
I nt r oduct i on
.....................................
B.
Gener al
C.
Speci f i c Met hods of Def l at i on i n t he Mi l i t ar y Sect or
Met hods of Def l at i on i n t he Publ i c Sect or
UNI TED STATES MI LI TARY PRI CE I NDEXES
.
115
115
116
125
................
138
.....................................
138
A.
I nt r oduct i on
B.
Bur eau of Economi c Anal ysi s'
C.
Depar t ment of Def ense' s I ndex
D.
Of f i ce of Management
E.
Depar t ment of t he Ar my' s I ndex
F.
Speci al
St udi es
Def ense Def l at or
. . .
.....................
and Budget ' s Def l at or . . . .
139
140
142
..................
142
.................................
143
PRI CI NG THE MI LI TARY BUDGET
...........................
A.
Di r ect Pr i ci ng - Needs and Possi bi l i t i es
B.
For mul a Appl i c at i on
C.
Sampl i ng
D.
St r uct ur e
14b
.......
145
...............................
157
.........................................
174
.......................................
179
xxi x
TABLE OF CONTENTS
( cont i nued)
PAGE
VI I I .
E.
Mi l i t ar y Per sonnel
- Act i ve and Ret i r ed
F.
Oper at i on and Mai nt enanc e
G.
Pr oc ur ement
H.
Resear ch,
I.
Mi l i t ar y Cons t r uc t i on
J.
Fami l y Housi ng,
K.
Ci vi l
L.
Revol vi ng and Management
187
..........
205
.......................................
220
. . . .
241
...........................
251
.........................
261
.....................................
262
Devel opment ,
Def ense
Test and Eval uat i on
Def ense
Funds
A.
Basi c Needs
B.
Recommendat i ons
...................
262
....................
267
.....................................
267
...................................
276
CONCLUSI ONS AND RECOMMENDATI ONS
BI BLI OGRAPHY
..........
........................................
. . . .
283
APPENDI X
I-A
Summar y of a Meet i ng on t he Devel opment of a Pr i ce
Def l at or f or Mi l i t ar y Expendi t ur es , Febr uar y 8 , 1973
295
What a Pr i ce I ndex Shoul d Me a s u r e . . . . . . . . . .
309
I I I _A
Gui del i nes f or Adj ust ment of New Aut omobi l e Pr i ces
f or Changes i n Qual i t y of Pr oduc t
................
342
III-B
Gui del i nes f or Adj ust ment of Pr i ces f or New Tr act or s,
Far m Mac hi ner y and Equi pment f or Changes i n Qual i t y
of Pr oduct
.......................................
11- A
III-C
Pr i ce and Cost
I ndexes f or t he Shi pbui l di ng I ndust r y
III-D
An Exampl e of Mat er i al Speci f i cat i ons:
St eel For gi ngs
...................................
351
362
371
XXX
TABLE OF CONTENTS
( c ont i nued)
PAGE
V- A
VI - A
VI - B
Count r y Pr act i ces i n Nat i onal Ac count i ng at
Const ant Pr i ces
. , ........
372
Summar i es of U. S. Gover nment Cons i der at i ons of
Pr i ce I ndi ces, 1966- 1972
378
A Bur eau of Economi c Anal ys i s Def ense Def l at or
. . .
424
VI I - A
I ndexes of Navy Cont r act Pr i ces . . . . . . . . . . .
447
VI I - B
Feder al
455
VI I - C
Suppl y Cl as si f i cat i on Code
. . . .
.........
Exampl es of Commodi t y Spec i f i c at i ons Pr i c ed—Ar my
Labor at or i es . . . . . . . . . . . . . . . . . . . . . . . .
470
XXX i
LI ST OF EXHI BI TS
PAGE
I I - 1.
24
Def i ni t i ons and Symbol s
I l l - 1.
Pr i ce I ndex Adj us t ment
I l l - 2.
Qual i t y and Quant i t y Change
I V- 1.
f or Qual i t y Change
, .
73
................
Di st r i but i on of Out put s and Or gani zat i onal
El ement s - - DoD- FY 1971
.....................
,
104
. . .
117
V- 1.
Def ense Ex pendi t ur es at Const ant
V- 2.
Met hods f or Reval ui ng Cur r ent Mi l i t ar y
Expendi t ur es at Cons t ant Pr i ces i n t he
Uni t ed Ki ngdom
.............................
134
Def l at or s f or Feder al
141
VI - 1.
Pur chases,
Pr i ces
45
1972
. . ...
Resear ch Devel opment Test and Eval uat i on.
Di r ect Obl i gat i ons by Obj ect Cl ass and
Act i vi t y , FY 1972 . . . .
. ................
161
VI I - 2.
Hypot het i cal
..................
165
VI I - 3.
FY 1972 Pr oc ur ement of Equi pment and
Mi ssi l es ( PEMA) - Ar my Pr ogr am
..............
167
VI I - 4.
Summar y of Communi c at i ons and El ect r oni cs
Equi pment by Cost Gr owt h Cat eogr y, FY 1972
168
VI I - 5.
Est i mat ed Ex pendi t ur e Rat es f or a Gi ven Year ' s
Tot al Obl i gat i onal Aut hor i t y
..............
172
VI I - 6 .
Summar y of Pr i ci ng Recommendat i ons , . . . . . . . .
180
VI I - 7.
Si x Sugges t ed Syst ems of Pr i ce I ndexes
182
VI I - 8 .
Oper at i ons and Mai nt enanc e
............ ..
VI I - 9
Pr oc ur ement
................
223
VI I - I O
Ar my Ai r c r af t and Spar e Par t s Pr ogr am,
FY 1972 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
224
VI I - 1.
I l l ust r at i on
Budget
Pr ogr am
. . .
•
212
XXX i i
LI ST OF EXHI BI TS
( cont i nued)
PAGE
VI I - 11.
VI I - 12.
VI I - 13.
VI I - 14.
Compar i son of Cost and Pr i ce I ndi ces f or
Mi l i t ar y Ai r c r af t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
228
Ar my Communi c at i on and El ect r oni c
Equi pment , FY 1972
236
I mpact St udy Pr oc ur ement Gr oups and
Ex e mp l a r s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
239
Mat er i al s,
246
Suppl i es and Equi pment
..............
1
I.
A.
I NTRODUCTI ON
Backgr ound
Thi s r epor t was pr epar ed by t he Gover nment Di vi si on,
Economi c Anal ys i s ( BEA) of t he U. S.
t r act wi t h t he U. S.
Ar ms Cont r ol
has an ac t i ve i nt er est
Bur eau of
Depar t ment of Commer ce,
under c on
and Di sar mament Agency ( ACDA) .
ACDA
i n t he st at e of t he ar t f or cons t ant - pr i ce
meas ur es of mi l i t ar y expendi t ur es t hr oughout t he wor l d.
Capabi l i t i es
f or def l at i ng mi l i t ar y ex pendi t ur e dat a have an i mpor t ant bear i ng on
abi l i t y t o ( 1) moni t or r eal
t he U. S.
changes i n t he si ze of def ens e sect or s i n
and f or ei gn count r i es,
( 2) eval uat e t he i mpact of mi l i t ar y
spendi ng on t he domest i c economi es of t hose count r i es,
i nt er nat i onal
B.
and ( 3) make
compar i s ons of def ens e ef f or t s.
Pr obl em
The def l at i on of val ue dat a i nvol ves t he at t empt t o el i mi nat e t he
ef f ect of changi ng pr i ce l evel s ov er t i me.
Expendi t ur es expr es sed i n
cur r ent pr i ces ar e def l at ed by an i ndex of r el at i ve pr i ce c hange t o ob
t ai n r eal
or cons t ant - dol l ar est i mat es of t hose expendi t ur es.
adj ust ment ,
i nt er t empor al
Wi t h t hi s
and ot her compar i s ons of expendi t ur es ar e
f aci l i t at ed.
At pr esent ,
t he means of meas ur i ng t he ef f ect s of pr i ce changes
on mi l i t ar y spendi ng ar e gener al l y cons i der ed t o be i nadequat e.
st r uct i ng cons t ant - v al ue meas ur es t o dat e,
t o sur r ogat e pr i ce i ndexes,
I n c on
anal ys t s have us ual l y r esor t ed
based on c i v i l i an- mar ket pr i ce changes.
cept i n speci f i c pr oc ur ement ar eas,
Ex
t he l i t er at ur e cont ai ns no subst ant i al
2
di scus si on of t he di f f i c ul t i es i nvol ved and t he f eas i bi l i t y of f i ndi ng
sol ut i ons t o pr obl ems of mi l i t ar y pr i ce measur ement .
C.
Obj ect i ves
The pr i mar y obj ect i ve of t hi s st udy i s t o appr ai se bot h t he i deal
r equi r ement s f or and t he pr act i cal
possi bi l i t i es of measur i ng pr i ce
changes of mi l i t ar y expendi t ur es.
By exami ni ng avai l abl e i ndexes and
dat a,
t he st udy seeks t o expl or e t he possi bi l i t i es of i mpr ovi ng t hese
i ndexes or devel opi ng new ones.
c ont ex t of t he U. S. ,
Al t hough t he maj or emphasi s i s i n t he
a maj or obj ect i ve i s t o f aci l i t at e t he adopt i on of
t hese i mpr ovement s and i nnovat i ons i n ot her count r i es as wel l .
I mpr oved
def l at or s woul d l ead not onl y t o bet t er est i mat es of r eal
def ense
expendi t ur es but
t o i ncr eased i nsi ght
i nt o di f f er ent i al
st ant dol l ar change at det ai l ed l evel s.
Thi s,
pr i ce and c on
i n t ur n,
anal ys i s of changes i n t he r el at i ve emphasi s ( i n r eal
t ot al
woul d f aci l i t at e
t er ms)
on t he
var i ous component s of mi l i t ar y expendi t ur es.
D.
Scope of Wor k
The r epor t exami nes a var i et y of concept s of pr i ci ng,
l at i ons and met hods.
t he- ar t "
Some appr oaches ar e beyond t he cur r ent
of meas ur ement ;
not f easi bl e.
i ndex f or mu
t hey ar e di scussed as i deal s but di smi ssed as
The basi c dat a t hat ar e needed ar e desc r i bed and compar ed
wi t h basi c dat a t hat ar e avai l abl e or whi ch can be devel oped.
cl us i on i s t hat
" st at e- of -
The con
i t i s f easi bl e wi t h commi t ment of r el at i vel y moder at e
r esour ces t o cons t r uc t a set of pr i ce i ndexes f or mi l i t ar y pur chases
usi ng dat a f r om mi l i t ar y exper i ence.
3
The r epor t concl udes t hat
f or U. S.
mi l i t ar y expendi t ur es.
i ndexes f or budget cat egor i es.
i t i s f easi bl e t o const r uct
pr i ce i ndexes
I t st ops shor t of pr esent i ng act ual
Such an ef f or t r equi r es r esour ces be-
yong t he r each of t he BEA pr oj ect .
E.
St r uct ur e of t he Repor t
The next t hr ee chapt er s of t hi s r epor t deal
f or mul at i ons and pr i ci ng i n gener al .
wi t h basi c concept s,
Chapt er s V and VI
met hods empl oy ed i n def l at i on of f or ei gn and U. S.
pr esent
cur r ent
mi l i t ar y budget s.
Chapt er VI I di scusses f or each budget cat egor y pr obl ems of pr i ce meas
ur ement wi t h speci f i c suggest i ons on how t o pr oceed wi t h t he c ons t r uc
t i on of
pr i ce i ndexes.
An exposi t i on of t he r epor t ' s conc l usi ons and
r econmendat i ons i s pr esent ed i n Chapt er VI I I .
The r epor t
i ncl udes an
ext ensi ve bi bl i ogr aphy f ol l owed by appendi xes whi c h suppor t t he mai n
body of t he t ext .
4
II.
A.
CONCEPTS AND FORMULATI ONS
Some Concept s
The pr i nci pal
goal
of t he pr i ce measur es desc r i bed i n t he f ol l ow
i ng pages i s t o enabl e user s t o der i ve a meas ur e of changes i n t he de
f ense budget
i n cons t ant dol l ar s.
t he def ens e budget
i s,
t her ef or e,
A def i ni t i on of quant i t y change i n
ei t her
i mpl i ed or st at ed.
Si nce
t he pur pose of pr i ce meas ur e i s t o obt ai n a " def l at ed val ue" — or
quant i t y — i ndi cat or ,
i t i s essent i al
t hat t he quant i t y meas ur e be de
f i ned because ever y deci si on made dur i ng t he pr ocess of pr i ce meas ur e
ment af f ect s i t t hr ough t he gener al
cons t r ai nt
t hat ,
somehow or ot her ,
pr i ce and quant i t y measur es t oget her must yi el d a uni que val ue measur e
i n cur r ent dol l ar s.
What ev er def l at or
concept )
i s devel oped must
be const r uct ed ( at l east
i n such a way t hat t he pr i ce i ndex i s compar abl e i n al l
spect s wi t h a def i ned val ue concept .
t hen t he pr i ce dat a must
pendi t ur es;
pur chases r at her t han f i nal
sal es or out put val ues,
so must
Thi s i s a necessar y but
pr i ce i ndex must
r equi r es.
a new i t em of equi pment
( end- pr oduct )
I n addi t i on,
be cons t r uc t ed i n accor d wi t h a conc ept
For exampl e,
r ef er t o ex
pr i ces.
i nsuf f i ci ent condi t i on.
t o a quant i t y ( const ant dol l ar )
r e
I f t he val ue dat a r ef er t o ex pend
i t ur es r at her t han obl i gat i ons,
i f val ues r epr es ent
in
f i gur e,
t hat wi l l
t he
l ead
whi ch car r i es a meani ng t he user
a pr i ce i ndex i n whi c h a qual i t y adj ust ment f or
i s based on t he addi t i onal
per f or manc e of t he
equi pment r esul t s i n a def l at ed val ue meas ur e i n whi c h quant i t y i s
meas ur ed i n uni t s of per f or mance.
Thi s i s a di f f er ent meas ur e f r om
5
one i n whi ch t he pr i ce i ndex i s adj ust ed on t he basi s of addi t i onal
sour ces ( cost ) ,
st i l l
ment
r equi r ed t o pr oduce t he addi t i onal
per f or mance,
r e
and
di f f er ent f r om t he quant i t y change i mpl i ed i f no qual i t y adj us t
i s made.
Thes e al t er nat i ves wi l l
t er ms i n r el at i on t o per sonnel
The i mpor t ant poi nt
r epr es ent
i s:
be di scussed i n mor e speci f i c
and mat er i al
i t i s essent i al
i t ems i n t he mi l i t ar y budget .
not onl y t hat
t he pr i ce meas ur e
t he same scope or cover age as t he val ues t o be def l at ed but
al so t hat t he desi r ed meani ng of t he quant i t y meas ur e be c ons t ant l y kept
i n mi nd.
1.
I nput vs.
One of
Out put Measur es
t he f i r st cons i der at i ons i s whet her pr i ce measur es
shoul d r ef er t o t he " pr i ce of mi l i t ar y out put " — at a l evel
compar abl e
t o sal es or pr oduct i on val ue i n t he busi ness s ect or — or t o pur chases
( i nput s) .
Thi s deci si on makes a di f f er ence not onl y i n t he t ype of pr i ce
dat a t o be compi l ed and t he i ndex t o be const r uct ed,
nat ur e of t he st at i st i cal
t hat
compr omi ses t hat must
some of t he desi r ed dat a ar e unavai l abl e.
out put pr i ce i ndex wer e desi r ed,
of Def ense [ DOD]
f or exampl e,
but al so i n t he
be made i n t he event
I f a mi l i t ar y - est abl i s hment
( assumi ng a U. S.
Depar t ment
out put meas ur e coul d be def i ned) and as l i kel y,
of out put ar e l acki ng,
pr i ces
i t woul d be conc ept ual l y f eas i bl e t o combi ne
pur chase pr i ce i ndexes as est i mat or s.
Thi s mi ght conc ei vabl y be pos
si bl e i f cons i der at i on of pr oduc t i vi t y change wi t hi n DOD coul d be
meas ur ed and br ought
i nt o t he equat i on.
i n t he pur chase pr i ce i ndexes,
coul d be omi t t ed.
however ,
I f one wer e i nt er est ed onl y
t he i n- house pr oduc t i vi t y dat a
6
Not
onl y shoul d a di st i nct i on be made bet ween t he conc ept of a
mi l i t ar y out put
pr i ce i ndex and a mi l i t ar y i nput
i s al so usef ul
t o di st i ngui s h bet ween t he i nput
pr i ce i ndex,
but
pr i ce i ndex of DOD and
t he out put pr i ces of suppl i er s of goods and ser vi ces t o t he DOD.
gener al ,
it
pur chase pr i ce i ndexes may di f f er f r om out put
In
i ndexes at t he
next ear l i er pr ocessi ng or sal es st age i n a number of r espect s:
a.
Tr anspor t at i on r at es may be i ncl uded i n t he pur chase
pr i ce of a good pur chased but not
I n t hi s event ,
cost
a deci si on must
i n t he out put
pr i ce of a manuf act ur er .
be made ei t her t o i ncl ude t r anspor t
i n t he basi c pur chase pr i ce or t o pr i ce t r anspor t at i on as a
separ at e i t em. - /
b.
Exci se t axes may be i ncl uded i n pur chase pr i ces but
not
i n t he pr i ce of out put s.
c.
I nst al l at i on char ges may be i ncl uded i n t he pur chase
pr i ce or may need t o be added.
d.
Speci al
di scount s may af f ect
whol es al e or ot her i nt er medi at e l evel
e.
pur chase pr i ce,
t he pur chase pr i ce at t he
but not t he out put
pr i ce at f act or y.
Shi f t s by buyer f r om one sel l er t o anot her woul d af f ect
but not out put
pr i ce of sel l er s.
Thes e ar e a f ew of t he di f f er ences t hat can di st i ngui sh i nput
pr i ces of buyer s f r om out put
pr i ces of s uppl i er s .
I n t he case of
mi l i t ar y pur chases t her e may be ot her char ges or di scount s t o be
1/
I n t hi s case, t he f ur t her quest i on ar i ses whet her t o t r eat qoods
pur chased f r om mor e di st ant sour ces t hi s year , compar ed wi t h l ast
year , as ex per i enci ng a pr i ce r i se i n t he absenc e of pr i ce chanqe
i n goods at ei t her sour ce or i n t r anspor t at i on r at es.
7
consi der ed,
such as pr i ce es cal at i on cl auses i n del i ver y cont r act s,
payment s f or speeded- up del i ver y or penal t i es f or l at eness.
2.
Types of
I nput
Pr i ce I ndexes
Because a pur chase pr i ce i ndex i s l i kel y t o oc cupy an
i mpor t ant
budget ,
pl ace i n t he devel opment of
sever al
a.
t ypes of
pr i ce i ndexes f or t he mi l i t ar y
pur chase pr i ce i ndexes ar e not ed:
St andar d Pr i ce I ndexes
The l east compl ex of t he i nput
pr i ces may be c ons t r uc
t ed i n t he same way as any ot her pr i ce i ndex,
mor e of t he var i ous i ndex f or ms:
accor di ng t o one or
a " mar ket basket , " consi st i ng of
dol l ar expendi t ur es f or pr oduct s and ser vi ces pur chased,
l i shed f or some poi nt
i n t i me;
sampl e pr i ces of speci f i ed pr oduct s
and ser vi ces ar e compi l ed over a per i od of t i me;
and t he r el at i ve
changes i n pr i ces ar e wei ght ed wi t h t he expendi t ur es.
physi cal
i s es t ab
goods and ser vi ces i n t he or i gi nal
baskef ' ar e r epr i ced each i ndex per i od.
That
or cur r ent
i s,
t he
" mar ket
The meas ur e devel oped
under t hi s pr ocedur e hol ds t he quant i t i es — over t he t i me t he wei ght s
ar e f i xed- - i n const ant
i nput
r el at i onshi p t o one anot her .
pr i ce i ndexes ar e used as out put
I n case mat er i al
pr i ce es t i mat or s t hi s means
t her e i s an i mpl i ci t wor k i ng as sumpt i on t hat
t he quant i t i es of
goods pr oduced ar e al so i n f i xed r el at i ve pr opor t i ons and t hat f or
each good pr oduced t he quant i t y of mat er i al s and ser vi ces r equi r ed
f or a gi ven quant i t y of each t ype of out put
3/
t i ons t o one anot her .
2/
~
3/
—
r emai n i n f i xed pr opor -
Thi s st at ement descr i bes ei t her a base wei ght ed or cur r ent
wei ght ed i ndex. Ot her f or ms can be us ed— see " I ndex For mul at i ons.
Thi s i nput - out put assumpt i on need not be uni que mat hemat i c al l y , i .
e. , t her e ar e speci al consi der at i ons wher e t he as sumpt i on need
not hol d.
8
Cost - Pr i ce I ndexes
b.
For t hi s t ype of
t hat
i ndex t he as sumpt i on i s r el axed
f or each good pr oduced t he component mat er i al s r emai n i n
f i xed r el at i ve pr opor t i ons t o one anot her .
I nst ead,
t he as s ump
t i on i s made t hat t he out put s ar e i n f i xed pr opor t i ons,
i nput assumpt i on per mi t s t echnol ogi cal
or ot her change t o occur ;
whi c h i n t ur n per mi t s t he subs t i t ut i on of one mat er i al
or even subst i t ut i on of
but t he
l abor f or mat er i al
f or anot her
or vi ce v er s a.
The changi ng nat ur e of mi l i t ar y cons t r uc t i on pr ovi des an
exampl e of a si t uat i on wher e t hi s t ype of
As t echnol ogi cal
and ul t i mat el y,
i ndex woul d be usef ul .
change br i ngs f or t h pr ef abr i cat ed component s
per haps,
even ent i r e modul ar ' uni t s,
t he nat ur e of
goods and ser vi ces pur chased t o pr ovi de t he same gener al
t ype of
st r uct ur e has changed and may cont i nue t o change mar kedl y.
end pr oduct al so changes,
of cour se,
The
but not t o t he same degr ee.
Al ong wi t h new met hods have come shi f t s of
pr oduct i on f r om t he
cons t r uc t i on si t e t o t he f act or y so t hat t he i mpor t ance of mat er i al s
pur c hased has i ncr eased r el at i ve t o on- s i t e l abor ,
c.
Modi f i ed Cost - Pr i ce I ndexes
The quest i on r ai sed by t hi s t ype of
t i al l y : How much must
i ndex i s es s en
t he pur chaser pay per uni t of
pur chase t hat quant i t y of mat er i al s and ser vi ces,
hi s own out put
whi c h woul d
per f or m t he same f unct i on wi t h t he same ef f i ci ency and ef f ec t i v e
ness or f aci l i t y,
as a uni t of mat er i al
( ser vi ce)
whi ch i s bei ng
to
9
r epl aced? One of t he st andar d i ndex f or ms woul d be modi f i ed so
t hat ,
i nst ead of spl i ci ng a new mat er i al
change,
i nt o t he i ndex at no pr i ce
an as sess ment woul d be made of cost r educt i on.
be used as an adj ust ment at t i me of
i nt r oduct i on.
( Cost i ncr eases,
owi ng t o war t i me subst i t ut es of l ess er ef f ect i veness,
woul d r esul t
Thi s woul d
f or exampl e,
i n adj ust ment of opposi t e nat ur e and ef f ect ) . Al so,
di r ect compar i sons woul d be made when subs t i t ut e mat er i al s had
t o r epl ace mat er i al s no l onger avai l abl e.
d.
" Cost of Li vi ng" Appr oac h.
For want of a bet t er name,
mi l i t ar y pur chase pr i ci ng,
concept
( l i ke c above)
and l abor t hat woul d be
f unct i on.
deal
4/
i n connec t i on wi t h
a " Cost of Li vi ng"
i ndex woul d i n
wi t h t he quant i t i es of mat er i al s
subs t i t ut ed t o per f or m a speci f i ed
I n t he absenc e of a cl ear def i ni t i on of out put of t he
" mi l i t ar y i ndust r y"
pr i ce i ndex.
t hi s i ndex woul d come cl os es t t o an out put
The subst i t ut i ons i n each case woul d be of a qual i t y
and quant i t y t o pr ovi de sat i sf ac t i on ( ef f ect i veness)
t he
suppl ant ed commodi t y.
of t echnol ogi cal
equal
to
Subs t i t ut i on occur s not onl y becaus e
i nnovat i on but al so among var i et i es of mat er i al s
i nput s and l abor as pr i ce r el at i onshi ps change.
of - l i v i ng i ndexes,
As i n t he cost -
i ndi f f er ence cur v e anal ys i s mi ght be empl oy ed
t o eval uat e dur abi l i t y,
per f or mance,
5/
et c. , wi t h r espect t o pr i ce.
4/ See " Resear ch i n Es t i mat i ng a Tr ue Cost of Li vi ng I ndex, " Resear ch
“
Di vi si on, Of f i ce of Pr i ces and Li vi ng Condi t i ons, U. S. Bur eau of
Labor St at i st i cs, Dec. 1971.
5/ I bi d.
10
Accor di ng t o one i nt er pr et at i on of t he cost - of - l i vi ng i ndex,
t he pr obl em i s sol ved by answer i ng t he quest i on,
day' s pr i ces woul d i t cost
" How much i n t o
t o make t he consumer as wel l
of f as
i n t he r ef er ence per i od?" The quest i on deal s i n sat i sf act i ons or
ut i l i t i es and al l ows subst i t ut i ons i n t he mar ket basket ,
cr i bed above.
c ur v e— i . e. ,
as des
The t heor y gener al l y deal s wi t h a f i xed i ndi f f er ence
consumer s'
t i ons of goods ( e. g. ,
t ast es ar e pr esumed f i xed,
beef f or por k)
and subs t i t u
ar e assumed t o occur onl y i n
r esponse t o r el at i ve pr i ce changes.
Anot her appr oach,
set f or t h by Fi sher and Shel l ,
change i n t ast e and poses t he quest i on,
map and compar i ng t wo hypot het i cal
much i ncome woul d t he consumer
al l ows f or
" Gi ven an i ndi f f er ence
si t uat i ons ( a) and ( b) ,
how
i n ( b) r equi r e t o make hi m i ndi f f e
r ent bet ween f aci ng ( b' s) pr i ces and f aci ng ( a' s) pr i ces at a
6/
gi ven i ncome?"
Thi s quest i on does not deal wi t h ut i l i t i es or
wel f ar e expl i ci t l y,
i mpl i ci t .
al t hough t hese consi der at i ons ar e no doubt
The quest i on and sol ut i on i s, of cour se,
of
t wo f or ms —
one assumi ng y es t er day 1s t ast e pat t er n ( a) appl i es t o bot h per i ods
and t he ot her assumi ng t oday' s t ast es ( b) .
I n t he vi ew of
and Shel l ,
i ndex i s t he one usi ng
cur r ent
t he mor e i nt er est i ng and usef ul
t ast es.
Fi sher
For t hi s r eason t he Paasche f or m of pr i ce i ndex
i s pr ef er r ed over t he Laspeyr es as an appr ox i mat i on of t he t r ue
cos t - of - l i vi ng i ndex.
6/
Fi sher , Fr ankl i n M. and Shel l , Kar l , The Economi c Theor y of Pr i ce
I ndi c es , Academi c Pr ess, New Yor k and London, 1972*
11
When quest i ons of out put
answer i s not t he same.
t he economy,
( pr oduct i on)
Her e,
ar e pr i mar y,
t he quest i ons become:
however ,
( 1) What woul d
whi c h had t he r i ght r esour ces t o pr oduce a bi l l
and ser vi ces i n per i od " a" at
" a' s" pr i ces,
woul d t he economy,
of goods
have pr oduced at
per i od pr i ces ( t he t echnol ogy r emai ni ng as i n " a" ) ?
t he
" b" -
or ( 2) What
whi c h act ual l y pr oduced a gi ven set of goods when
pr i ces wer e at " b, " have pr oduced at
" a' s" pr i ces ( t he t echnol ogy
r emai ni ng as i n " b" - per i od) ?
I n t er ms of pr i ces,
r ead:
( 1) What
economy t hat
now val ued at
t hese t wo quest i ons can be r est at ed t o
i s t he abi l i t y ( i n t er ms of val ue) ,
pr oduced t hi ngs at
" b' s"
e. g. ,
of
t he
" a' s" pr i ces t o pr oduce t hi ngs
pr i ces ( wi t h t he t echnol ogy of
" a" ) ?or
( 2)
What coul d an economy t hat ac t ual l y pr oduced a val ue at " b' s"
pr i ces pr oduce at
" a' s" pr i ces ( wi t h t he t echnol ogy of " b" ) ?
Fi sher and Shel l ' s j udgment on r el evancy of t hese t wo i ndexes
i s t hat ,
so f ar as def l at ed val ue i s concer ned,
a measur e based
on yest er day' s abi l i t y t o pr oduce goods val ued t oday i s mor e usef ul
t han one based on an out moded t echnol ogy and t ast e.
Thi s r easoni ng
l eads t o t he use of a Paasche out put meas ur e and a Laspeyr es
pr i ce i ndex as es t i mat ed f or t he desi r ed cons t ant - dol l ar meas ur es
t he opposi t e
nat i onal
concept
t o t hat cur r ent l y f ol l owed i n def l at i on of
account s.
7/ Two ot her possi bl e i ndexes ar e ment i oned, but ar e not di scussed
“
her e. Thes e ar e di smi s sed by Fi sher and Shel l as not of i nt er est
because t hey deal wi t h si t uat i ons t hat do not and have not
exi st ed.
12
The aut hor s make anal ogi es bet ween t hei r r ecommendat i ons vi sa- vi s t he cost - of - l i vi ng i ndex and t he one t hey pr ef er f or nat i onal
account s«def l at i on.
Thei r pr ef er ence f or t he Paasche f or m f or t he
cos t - of - l i vi ng pr i ce
i ndex ar i ses,
i t appear s,
t hese t wo measur es.
whi l e usef ul
i ndex and t he nat i onal
Thus,
i n i t sel f ,
account s quant i t y
f r om t he pr i mar y publ i c i nt er est
t he i mpl i ci t nat i onal
in
account s def l at or ,
i s appar ent l y vi ewed as a way- st at i on i n
t he j our ney t owar d t he const ant - dol l ar measur e.
The cost - of - l i vi ng
i ndex— as appr ox i mat ed by t he Consumer Pr i ce I ndex ( CPI ) — i s of
i nt er est
i n i t sel f ,
wi t h l i t t l e or no i nt er est
cons t ant - dol l ar val ue of
woul d Fi sher and Shel l
l i vi ng. "
shown i n a t ot al
I f t her e wer e such an i nt er est ,
r evi se t hei r pr i or i t i es t o t he ext ent wher e
t he Laspeyr es CPI woul d become t hei r pr ef er r ed i ndex t o mat ch t hei r
pr ef er ence f or t he Laspeyr es pr i ce i ndex f or nat i onal
account s
def l at i on? They do not say.
Yet t he quest i on i s not al t oget her f r i vol ous when al l
t hi s
i s consi der ed i n connec t i on wi t h a pr oposed def l at or f or mi l i t ar y
pur chases.
Whet her t he mi l i t ar y pur chase pr i ce i ndex i s vi ewed
as a st and- i n f or a consumer pr i ce meas ur e wi t h t he Pent agon as
c ons umer or whet her
( as i n t he nat i onal
account s)
seen as an est i mat or of a mi l i t ar y out put
r emai ns:
Whi ch t echnol ogy shal l
y es t er day' s?
t he i nput
pr i ce i ndex,
t he quest i on
be hel d c ons t ant — t oday' s or
The quest i on i s one of pr ef er ence and goal
not be answer ed i n obj ect i ve t er ms.
ar i ses wi t h t he " cost " - t ype i ndex.
i ndex i s
and c an
Not e t hat t hi s quest i on onl y
Wi t h t he " ef f ect i veness, " you
13
r eal l y have,
i n pr i nci pl e,
t o use t he l at est y ear because t her e wi l l
al ways be many component s f or whi c h t he pr i ce i n any ear l i er y ear i s
i nf i ni t y . — A- bombs wer e not av ai l abl e at any pr i ce i n 1942 t hough
t he war r i ng power s woul d have pai d any amount f or t hem.
Unf or t unat el y,
a t r ue cost - i nput
t he cur r ent st at e of t he ar t wi l l
not per mi t
i ndex of t hi s t ype t o be const r uct ed,
al t hough i t
i s possi bl e t hat DOD coul d engage i n r esear ch i n t hi s di r ect i on.
Among ot her t asks,
t he met hodol ogy f or an i ndex t r eat i ng DOD as
consumer woul d have t o be devel oped,
i n cons t r uct i ng i ndi f f er ence cur ves.
wi t h al l
t he pr obl ems i nvol ved
As i n ot her i ndexes,
qual i t y change woul d pr obabl y be accept ed under t he
ut i l i t y"
appr oach,
cost l ess
consumer
but r ej ect ed i f onl y r esour ce- use ( cost ) f act or s
ar e al l owed t o det er mi ne qual i t y- change adj ust ment s.
choi ce appear s t o be mor e pr act i cal .
i ndex concept among t he i nput
The l at t er
I t seems t hat t he appr opr i at e
i ndexes wi l l
be f ound among t he
ot her t hr ee des c r i bed.
Now,
bef or e appl yi ng t hose gener al i zed concept s and def i ni t i ons
t o pr i ci ng and quant i t y meas ur ement ,
i t woul d be wel l
t o exami ne
br i ef l y a f ew i ndex f or mul ae.
B.
I ndex For mul at i ons
I t i s not t he pur pose of t hi s paper t o deal
ex haus t i vel y wi t h
t he var i ous i ndex f or mul ae by means of whi c h dat a on pr i ces can be
8/
compi l ed t o pr oduce an i ndex of pr i ce change over t i me. -
8/
The
I nt er - spat i al i ndexes ar e not spec i f i c al l y consi der ed, but many
of t he f or mul ae di sc us sed can be adapt ed t o t he pur pose of i nt er
nat i onal compar i son.
14
choi ce and def i ni t i on of a concept of pr i ce meas ur ement
mor e i mpor t ant
number .
t han t he wei ght - bas e or f or mul at i on of an i ndex
I ndex f or mul ae can be vi ewed as t ool s t o accompl i sh a
speci f i c pur pose,
and l i ke ot her t ool s,
whi c h does t he speci f i c t ask.
i deal ,
i s f ar
i ndex f or mul a cannot
t he best one i s t hat
The sear ch f or an al l
pur pose,
be pr oduct i ve unl ess an al l
pur pose
speci f i c def i ni t i on of pr i ce or quant i t y can be devel oped.
vi ew of
or
In
t he mul t i pl e pur poses of pr i ce and quant i t y anal ysi s,
such
st andar di z at i on woul d pr ove i nf l exi bl e and undesi r abl e.
Never t hel ess,
pur poses,
once concept s have been agr eed t o f or speci f i c
i ndex f or ms must conf or m.
The f ol l owi ng di scussi on pr e
sent s var i ous f or ms of pr i ce i ndex,
t oget her wi t h f or mul ae or
comment on t he cons i s t ent quant i t y-
or const ant dol l ar - measur e.
1.
The Laspeyr e* s I ndex
Thi s i ndex f or mul a r epr i ces a mar ket basket of t he base
per i od,
subst i t ut i ng each y ear
f or t he base year ' s pr i ces but
ef f ect ,
( mont h) . t he cur r ent year s' s pr i ces
l eavi ng quant i t i es unchanged.
i t answer s t he quest i on,
How much mor e( or l ess) woul d t he
goods and ser vi ces pur chased ( sol d)
t he past
In
at some speci f i c t i me i n
cost at t oday' s pr i ces?
The f or mul a f or t he pr i ce i ndex i s:
( 1)
Z P. Q
1 0
> wher e P and Q ar e
2 poQo
pr i ce and quant i t y and " 1" and V ,
r espect i vel y.
t he cur r ent and base per i ods,
15
The i ndex can al so be wr i t t en as an ar i t hmet i c mean of pr i ce
r el at i ves:
wher e t he wei ght s ar e base- y ear val ues.
2.
The Paasche I ndex
Thi s i ndex deal s wi t h pr i ce change di f f er ent l y:
basket
i s changed at each cur r ent
per i od and cur r ent - per i od pr i ces.
t he mar k et bask et
i ndex per i od and pr i ced i n baseI t shoul d be not ed t hat ,
i s cont i nual l y changed,
base t o cur r ent year .
not ,
a changi ng wei ght
t he Laspeyr es i ndex,
9/
t o anot her .
al t hough
i t i s hel d const ant
each pai r ed compar i son,
st r i ct l y speaki ng,
t he mar k et
f or
The i ndex i s t hus
i ndex,
al t hough unl i ke
t he wei ght s di f f er f r om one cur r ent
per i od
The pr i ce i ndex f or mul a i s:
( 2)
£ Pi Qi
E PoQi
I t i s expr essed,
£ Pi Qi
«
Pi Qi
i n t he r i ght member ,
as a har moni c mean of
pr i ce
r el at i ves wi t h cur r ent - per i od val ues as wei ght s.
9/ A t r ue changi ng- wei ght pr i ce i ndex mi ght be wr i t t en £ Pi Q- j / £ Q-j *
£ PoQo / £ Qo. Thi s f or m has onl y l i mi t ed usef ul ness, however ,
i nasmuch as t he Q' s must be somewhat homogeneous t o be addi t i ve.
16
* hen a Lapeyr es pr i ce i ndex i s used t o def l at e val ue dat a
and obt ai n an i ndi cat or of quant i t y ( c o n s t a n t ^ ! l ar ) ,
t he der i ved
quant i t y meas ur e i s of t he Paasche f or m:
( 3)
2 pi q i
£ p ( 0o
i r j A
Si mi l ar l y,
measur e,
=
a Paasche pr i ce i ndex yi el ds a Laspeyr es quant i t y
t hus:
E p i q1
(4 )
3.
£ P^ O,
£ P0 q ,
E Pt Q,
The Edgewor t h I ndex .
Thi s For mul a was devel oped i n an ef f or t not
t o gi ve undue
i mpor t ance t o ei t her t he base- per i od wei ght s or t hose of t he gi ven
r ear .
The wei ght s ar e aver ages of base- and cur r ent - wei ght s:
( 5)
Z
Pi
( Qi
+
V
2
^
CQi
+
Qo)
The der i ved quant i t y i ndex i s cons i der ed r at her st r ai ned i n concept :
W £ P i q1
^£ Pj ( Qj
Qo )
2 PnQn
0 o
^ P ( Q.
o' y i
V
_
£ ■>„ « ,
Z P Q
oxo
The quant i t y meas ur e r epr esent s t he change i n out put
per i od t o an aver age l evel
wei ght s.
Si mi l ar l y,
i n y ear
+ Qo )
z ? Q.
2
pi(Q i+
f r om base
" i " and " o" wi t h base year
t he Edgewor t h quant i t y i ndex i mpl i es a si mi l ar l y
compl ex pr i ce measur e.
Qo)
17
4.
Fi sher ' s " I deal "
I ndex
Thi s i ndex was devel oped t o sat i sf y t wo t est s:
r ever sal
t est and t he f act or r ever sal
t est .
The t i me r ever sal
r equi r es t hat , when dat a f or t wo year s ar e combi ned
f or mul a but wi t h t he t i me ( i ' s and o' s)
t he t i me
t est
under t he same
and bases r ever sed,
t wo i ndex number s shoul d be t he r eci pr oc al s of each ot her .
t he
The
10/
i ndexes desc r i bed t hus f ar f ai l
The f act or r ever sal
shoul d equal
t hi s t est .
t est r equi r es t hat t he val ue r el at i ve
t he pr oduct of t he pr i ce i ndex and quant i t y i ndex,
bot h cons t r uc t ed wi t h t he same f or mul a.
above f ai l
t hi s t est ,
al so.
Thus,
The i ndexes descr i bed
t he pr oduct of t he Laspeyr es
pr i ce and quant i t y i ndexes does not equal
t he val ue r el at i ve
change:
I n f act ,
i t was demons t r at ed above t hat t he pr oduc t of Paasche
pr i ce ( or quant i t y)
and Laspeyr es quant i t y ( or pr i ce)
t he val ue change.
Fi sher ' s " I deal "
10/
For exampl e:
i ndex meet s bot h t est s:
i ndeed yi el ds
18
5.
The I kl e I ndex.
The aut hor st at es t hat ,
can el i mi nat e t he ef f ect of
" t he at t empt
t o f i nd an i ndex t hat
pr i ce di f f er ences on t he val ues of t wo
or mor e economi es whos e pr i ce and quant i t y st r uct ur es di f f er i s
gener al l y conceded t o be f ut i l e.
vi ew,
The i ndex pr oposed i n t he aut hor ' s
does pr ovi de a met hod f or adj ust i ng f or pr i ce di f f er ences.
wher e E = t he pr i ce i ndex,
quant i t y,
R = t he quant i t y i ndex,
p = pr i ce,
q =
v = p q ^ t h e super scr i pt s ( ' ) and ( " ) r ef er t o t he r espec
t i ve aggr egat es and t he subs cr i pt
" 1" t o a good or ser vi ce,
and ( RE)
i s t he val ue of aggr egat e ( ' ) di vi ded by t hat of aggr egat e ( " ) .
wei ght s of
The
t he pr i ce i ndex ar e har moni c means of quant i t i es of t he
t wo per i ods ( or pl aces)
but adj ust ed f or l evel
( R) and t he wei ght s
of t he quant i t y i ndex ar e t he pr i ces ( uni t val ues)
obt ai ned by
aggr egat i ng t he val ue of each i t em ( adj ust ed f or over - al l
H Z I kl £,
~
val ue
Dor i s M. , " A New Appr oach t o t he I ndex Number Pr obl em, "
The Quar t er l y Jour nal of Ec onomi c s . May 1972.
19
change)
and di vi di ng by a compar abl y - adj ust ed quant i t y f i gur e.
In
aver agi ng wei ght s of t wo per i ods t he I kl £ i ndex i s si mi l ar i n f or m
t o t he Edgewor t h f or mul a,
ex cept t he wei ght s of t he Edgewor t h
quant i t y i ndex ar e si mpl e aver ages of pr i ces.
I kl £ shows t her e i s a uni que val ue f or R,
ar r i ved at by an
i t er at i ve pr ocess.
As t he aut hor poi nt s out ,
t he i ndexes meet
t he r equi r ement
t hat
t he pr oduc t of t he quant i t y and pr i ce i ndexes equal s t he val ue r el a
t i ve but not t he t est t hat t he i ndex f or ms of pr i ce and quant i t y
r el at i ve be t he same.
i s not
i mpor t ant
Accor di ng t o I kl £ f ai l ur e t o meet t hi s t est
i n vi ew of t he pur pose of t he i ndex.
For t hose who wi sh t o l ook f ur t her i nt o t he ef f ect s of st r uct ur al
change on
anyt hi ng,
meas ur ement of pr i ce change and t he quest i on of what ,
can be done about
publ i shed not e by I kl 6,
it,
t he Appendi x I I - A,
cont ai ns
expandi ng on some of t he mat er i al
if
an un
i n her ar t i cl e.
12 /
6.
Gear y and Khami s I ndex es .
These pr i ce i ndexes— at
l east
i n t he " 2- poi nt " c as e— compar e
aggr egat es i n whi ch pr i ces of t he t wo per i ods ar e wei ght ed by t he
har moni c mean of t he quant i t i es:
(
10)
E Pi
^i %
q, + q 0 /
q, - qo
S
P.
“
he i ndex i s somewhat si mi l ar t o t he I kl 6 i ndex,
qi
+ q0
.
ex cept t hat t he l at t er
uses quant i t i es adj ust ed by t he quant i t y change i ndex.
12 /
See: Khami s, Sal em H. , " A New Sy st em of I ndex Number s f or Nat i onal
and I nt er nat i onal Pur poses, " Jour nal of t he Royal St at i st i cal ,
Soc i et y , Ser i es A ( gener al ) , Ed. 135, No. 1, 1972.
20
C.
Pr oduct Mi x Changes
One way of vi ewi ng t he f ai l ur e of an i ndex f or mul a t o meet
f act or r ever sal
mi x.
t est
t he
i s t o exami ne t he pr obl em of changi ng pr oduct
I f t he quant i t i es of each pr oduct changed pr opor t i onat el y , i . e. ,
i f qi = kqo ( K i s a const ant ) ,
woul d be equal .
I kl £,
t hen any i ndexes of t he f or m E P. ^
Thi s woul d equat e t he Laspeyr es,
and Gear y i ndexes,
f or exampl e,
out put s change i n var i ous ways,
dexes ( and quant i t y i ndexes)
appr oach i s t o at t empt
f or exampl e,
use i t
as wel l
however ,
Paasche,
as Fi sher s.
t he di f f er ent
Edgewor t h,
Because
pr i ce i n
ar e di f f er ent one f r om anot her .
One
t o el i mi nat e t he mi x pr obl em al gebr ai cal l y,
t he way Fi sher di d;
anot her i s t o t r y t o meas ur e and
i n anal ysi s.
Just as t her e ar e a number of f or mul at i ons of out put
and pr i ce
i ndexes,
so ar e t her e var i ous ways t o meas ur e pr oduct mi x.
exampl e,
l et us vi ew t he f ai l ur e of Laspeyr es pr i ce and quant i t y
i ndexes t o equal
For
t he val ue r el at i ve as owi ng t o pr oduct mi x change.
The meas ur e of mi x can be der i ved as f ol l ows:
0 1)
P0q°
wher e
of
P0q i
Pi qo
£ Pi ^i
s Po % ' Ml
r
Po %
M] i s t he i ndex of pr oduct mi x cons i s t ent wi t h Laspeyr es i ndexes
pr i ce and quant i t y ( P1 and Q] ).
(
12)
Mt =
1
( 13)
Pi
qi
/ Z Pi q6
z Po
M, = P„ / p
1 - ' p / Fl
or
Po^o
or
Op / Ol
P,
W
P0qi
%
/
J p 0%
21
Thus,
t he i ndex of pr oduct mi x i s equal
ei t her t o t he r at i o of t he
Paasche t o Laspeyr es pr i ce or quant i t y i ndexes.
I t can be shown,
si mi l ar l y,
t hat t he pr oduct mi x i ndex f or t he
Paasche pr i ce i ndex ( Mp ) i s:
( 14)
Mp = y P p
( 15)
Mp = 1/ M1
Qi / %
Hence,
I n t hi s f or m i t can be seen t hat
pr i ce i ndex t o obt ai n quant i t y,
cont ai ns t he mi x;
( 1) when val ue i s di vi ded by a
t he r esul t i ng pr oduct i on meas ur e
and i f val ue i s di vi ded by a quant i t y i ndex,
t he
pr i ce meas ur e cont ai ns t he mi x:
V
pp = «i
*p i
= Qp = Qi
- Mi
= Op • Mp
and ( 2) Fi sher ' s i ndex el i mi nat es t he mi x:
( 16)
N=
Because i t may be of
|
p,
• Pp • Ql ■ Op
i nt er est
= /
Wl
WV
t o know t he magni t ude of st r uct ur al
changes i n out put or def l at ed pur chases ( r eal
i nput ) ,
a case can
be made f or devel opi ng i ndex measur es i n a var i et y of ways and
compar i ng t hem t o as cer t ai n t he degr ee of mi x,
mi nat e t he mi x.
Thi s means,
meet i ng t he f act or r ever sal
i n ef f ect ,
t est ,
r at her t han t o el i
t hat r at her t han wor r y about
at t empt s shoul d be made t o meas ur e
t he mi x separ at el y.
D.
Li nkage Bet ween I ndexes of
I nput and Out put
Es peci al l y i n i nst ances wher e t he out put of an i ndust r y i s
compl ex,
nonhomogeneous ( as f or many i t ems of mi l i t ar y equi pment ) ,
i t i s di f f i c ul t t o def i ne pr i ce and quant i t y of out put or i nput
22
i n measur abl e t er ms. One must t hen r esor t
t o est i mat i ng t he out put
pr i ce changes f r om t he pr i ces of mat er i al s and ser vi ce used t o make
t he equi pment .
Some r ef l ect i on,
however ,
wi l l
r eveal
t hat — even
wher e t he pr oducer ' s pr of i t mar gi n and over head does not change
f r om one per i od t o anot he r - a si mpl e wei ght ed i ndex of pr i ces of
ser vi ces and mat er i al s wi l l
and usual l y does,
not suf f i ce.
The manuf act ur er may,
f i nd ways t o i mpr ove hi s ef f i ci ency i n use of
l abor t i me and mat er i al s so t hat a gi ven per cent age pr i ce i ncr ease
or wage- r at e i ncr ease wi l l
t han- pr opor t i onal
qui t e l i kel y be r ef l ect ed i n a l ess-
i ncr ease i n pr i ce.
I t i s al so possi bl e,
of cour se,
t hat decr easi ng ef f i ci ency i n use of mat er i al s and ser vi ces coul d
r esul t
of
i n a r el at i ve cost
i nput s.
i ncr ease gr eat er t han t he pr i ce i ncr eases
For t hi s r eason,
i t i s i mpor t ant
t o consi der changes i n
pr oduc t i vi t y— l abor and mat er i al - - when est i mat i ng out put
pr i ce
f r om t he pr i ce of i nput s.
The f ol l owi ng f or mul at i ons decompos e t he base- y ear - wei ght ed
pr i ce i ndex f or mul a ( Laspeyr es)
and l abor cost ,
i nt o component measur es of mat er i al s
i nput s pr i ces or ear ni ngs and i nput - out put
r at i os.
Si mi l ar anal ysi s coul d be per f or med on t he Paasche or ot her i ndex
f or m,
but
t hi s i s not done her e.
The obj ect i ve i s t o ascer t ai n,
whet her — and,
be combi ned
i f so,
by r evi ew of
t he i ndex f or m,
how- - subi ndexes f or mat er i al s and l abor can
wi t h sui t abl e wei ght s t o der i ve a pr i ce i ndex of
f ami l i ar t ype.
For pur poses of si mpl i ci t y,
i t i s assumed t hat
i s t he sum of l abor cost and mat er i al s cost ,
hence,
t he
val ue
pr i ce equal s
23
uni t l abor cost and uni t mat er i al s c os t s — i . e. ,
head ar e i gnor ed i n t he anal ysi s,
or assumed,
pr of i t s and ov er
t oget her ,
a manner cons i s t ent wi t h t he si mpl i f i ed assumpt i on.
cour se,
not necessar y t o t he mai n poi nt ;
t o move i n
Thi s i s,
of
i t woul d be possi bl e t o
cons t r uc t mor e compl ex f or mul ae t hat t ake t hese ot her f act or s
i nt o account .
Some not at i ons and def i ni t i ons ar e pr esent ed i n Exhi bi t
II-l .
24
EXHI BI T I 1- 1- - DEFI NI TI ONS AND SYMBOLS
Def i ni t i ons
V = G+W
G+W
V/ Q = Q
Symbol s
V = val ue of out put
=
P
G/ q = p
q /Q = r
G/ Q = pr = g
M/ Q = 1
G = mat er i al
cost
W = payr ol l
cost
P = out put
pr i ce
p = mat er i al
( i nput ) pr i ce
e = aver age hour l y ear ni ngs
W/ M = e
Q = quant i t y of out put
W/ Q = e 1 = u
q = quant i t y of mat er i al
M = man- hour s
P = g+u
g = uni t mat er i al
P = p r +e 1
cost
u = uni t l abor cost
9-j + u.j
r i / r n~
g+u
o o
r = uni t mat er i al
1 = uni t
Pn* / P0
l abor r equi r ement s
pi r i +ei 1i
i = gi ven year
P o 'V V o
o = base y ear
G'
r equi r ement s
- EG
I V
W' = Z W/ E v
25
St ar t i ng wi t h t he pr i ce i ndex:
( 17)
( 18)
( 19)
2 pi Q o
E( 9i
£ P0Q0
£(
£ Mo
■ s Mo
G' o + £ M o
_ E Pi r i qo
At t hi s poi nt ,
G' o +
£ «i ’ l l «
E 9i Qo + 2 Ui Qo
£ 9o Qo + £ M o
W‘ o
W' o
£ eo M o
t he pr i ce i ndex can be seen t o be t he wei ght ed
uni t mat er i al
Laspeyr es f or m,
9o+ u0 ) Qo
£ Mo
x P o Mo
aver age of
+ ui ) Go
combi ned
cost and uni t l abor cost
i ndexes of t he
wi t h base- y ear r el at i ve val ues of mat er i al
and l abor cost s.
I n t hi s f or m,
t he i ndex i s decept i v el y si mpl e and coul d l ead
t he unwar y i nt o t he t empt at i on t o combi ne an i ndex of mat er i al s
Pr i ces and an i ndex of aver age hour l y ear ni ngs ( or of wage r at es)
-----------
t o obt ai n a pr i ce i ndex.
a uni t mat er i al s cost
("r. "
11/
i ndex,
The f i r st
t er m of t he r i ght member
is
not a mat er i al s pr i ce i ndex , however ,
i n t he numer at or woul d have t o be " r Q11) and t he second t er m
i s not an ear ni ngs i ndex ( " 1 i " i n t he numer at or shoul d be " 10 " ) .
Now,
i f any,
l et us pr oceed f ur t her t o see under what ci r cumst ances,
mat er i al s pr i ces and ear ni ngs i ndexes can be used t o es t i
mat e pr i ce i ndexes.
13/
As i s of t en done t o es t i mat e cons t r uc t i on pr i ce change, f or
exampl e, i n t he absenc e of pr i ce dat a f or st r uct ur es of s pe
ci f i ed t ype and qual i t y.
26
St ar t i ng wi t h 19 above,
1•
l et
Uni t Mat er i al s Cost s,
( 20)
( 20a)
us exami ne each subi ndex separ at el y.
Pr i ces,
and Requi r ement s
Z p i n Qo
_ Z Pi r 0Q0
Z r i Pi Q0
^ Por oQo
^ Por oQo
^ r oPi Qo
^ (Pi r-,- / p0r 0 )
p0r 0Q0 ^ Z
( pi / Po )
E po r o %
( 21)
£ P, r i Q0
2 Por oQo
( 21a)
P0r 0Q0
E( r . / r 0 )
2 p0 r 0Q0
I Pi r 1. Q0
or
I ¥ o (0
Por i Qo
2 r 0P0Q0
2
Z( pi r i / pQr 0 ) p0r 0Q0
^ Z ( Pj
E po r oQo
Z r oPi Q0
/ pQ) pQr i Q0
Z( r .
E Por i Qo
Bot h f or ms show t he uni t mat er i al s cost
/ r Q) r 0pQQ0
2 r 0P0Qo
i ndex component of t he
pr i ce i ndex may be ex pr essed as t he pr oduct of a mat er i al s pr i ce i ndex
and an i ndex of
physi cal
mat er i al s r equi r ement s per uni t of out put
( uni t mat er i al s r equi r ement s) .
Thus,
t he mat er i al s cost
i ndex i s i n
f l uenc ed by changes i n mat er i al s pr i ces and changes i n t he physi cal
mat er i al
i nput mi x.
For mul as 20a and 21a show t hat
t he uni t mat er i al
t he pr oduct of al t er nat i v e pr i ce and uni t r equi r ement
20a t he wei ght s f or t he uni t cost and mat er i al
base- y ear val ue of mat er i al s;
( 20a)
y ear pr i ces;
i ndex i s
i ndexes.
In
pr i ce i ndexes ar e
quant i t i es at cur r ent -
i n 21a t he cost and r equi r ement
wi t h base- y ear mat er i al
cost
t he uni t mat er i al s r equi r ement s i ndex
i s wei ght ed wi t h base- y ear mat er i al
val ues,
but
r oPi Q0
i ndexes ar e wei ght ed
t he mat er i al s pr i ce i ndex empl oys
wei ght s of base- year val ues at cur r ent - year i nput r at i os.
27
2.
Av er age Ear ni ngs,
Uni t Labor Cost ,
( 22)
( 22a)
and Man- hour Requi r ement s
Z e. j l . j Q0 ^ Z
e^ 10Q0
Z 1 i e i Qo
^ eo ^ o %
eo^ o^ o
^ ^ oei %
^
Z ( e , H / e0 l 0 ) e0 l 0Q0 _ Z( e,
W
A
/ e0 ) e0 l 0Q0
2 0 n/ 1„ ) l „ ei Q0
E V o Qo
'
or
(2 3 )
( 23a)
Z e -j 1 - j Q0
Z
e - j l - ¡Q0
£ eo1oQo
^ eo^i ^o
Z ( e^l - ¡ / e0 l 0 ) eQl 0Q0
Z
1- j f i o Qo
^ ^oeo^o
= Z ( ei / e0 ) e0l i Qo • 2 ( ^i / ^o^ ^ oeoQo
2 eo^ o^ o
S So1i Qo
Bot h f or ms above show t hat t he uni t
s Vo ^ o
l abor cost component of t he
pr i ce i ndex may be expr es sed as t he pr oduct of an hour l y ear ni ngs i ndex
and an i ndex of uni t man- hour r equi r ement s — t he r eci pr ocal
of a pr o
duct i v i t y or out put - per man- hour i ndex.
For mul as 22a and 23a show t hat
t he uni t l abor cost
t he pr oduct of al t er nat i v e ear ni ngs and uni t man- hour
i ndex
i ndexes.
is
I n 22a
t he wei ght s f or t he uni t l abor cost and f or t he ear ni ngs i ndex
ar e base- year payr ol l s;
t he l abor r equi r ement
i ndex i s wei ght ed
wi t h base- year man- hour s at cur r ent y ear ear ni ngs;
i n 23a t he
l abor cost and l abor r equi r ement s i ndexes ar e wei ght ed wi t h basey ear payr ol l s,
but t he ear ni ngs i ndex empl oys wei ght s of base-
y ear man- hour s at cur r ent - year pr oduct i vi t y r at es.
uni t l abor cost
Thus,
t he
i ndex i s i nf l uenced by changes i n aver age hour l y
28
ear ni ngs and by pr oduct i vi t y change ( whi ch may be vi ewed as man- hour
i nput mi x compar abl e t o mat er i al
3.
i nput mi x) .
The Pr i ce I ndex Agai n
Now t he pr i ce i ndex ( no.
( 24) Z
Q
pi Q0 a Ep.1r oxo
z 1i e i Qo
zVi « o
O
O
O'
Zr oPi Q0
O
SPor oQo
Go , +
C L)
Po^ o
^ ei 1 0^0
ï r i Mo
W
2
19) can be wr i t t en:
or
( 25) Z pi Qo
Z P Q
0 0
ZPi HQo
^ i Po Qo
£p r . Q
_ 0 l x0
2V o « o
Go , +
^ r oPoQo
2eo^ i ^ o
^ o eoQo
Then we ar e r eady t o exami ne t he quest i on r ai sed at t he begi nni ng
of t he di scussi on.
Under what
ci r cumst ances,
i f any,
can mat er i al s
pr i ces and ear ni ngs i ndexes be used t o est i mat e pr i ce i ndexes?
F m
m
.—
h n f h
f n v 'm
ill a n
0 /1
-k ir. ^
—— • . w. mu. ue <-t anu
OCT
4 4.
il
4 »
4 j
j.
i b evi uent
« i
_
■
t nat
•
.
.
.
i n cer t ai n speci al
ci r cumst ances a pr i ce i ndex can pr oper l y be es t i mat ed f r om mat er i al s
pr i ces and aver age hour l y ear ni ngs ser i es:
a.
i f t he pat t er n of use of mat er i al s t o pr oduce t he
f i nal
pr oduct
has not changed ( i . e. ,
r at i o has r emai ned f i xed)
over t i me;
t he i nput - out put
and t he uni t man
hour r equi r ement s on t he aver age have r emai ned const ant ;
or
b.
i f t her e has been an of f set
uni t mat er i al
such t hat ,
on t he whol e,
i nput s i ncr eases ( decr eases)
\
have been
29
14/
4.
of f s et by uni t man- hour dec r eas e ( i ncr eases) .
15/
The Dacy I ndex .
Thi s i ndex f or m was devel oped on t he assumpt i on t hat t he
r at i o of mat er i al s t o out put r emai ns f i xed i n t er ms of
The as sumpt i on al l ows subs t i t ut i on of capi t al
and subst i t ut i ons bet ween wood and br i ck,
equi val ent
basi s) .
uni t s.
f or l abor and vi ce v er s a,
f or exampl e,
( on some physi cal
I t does not al l ow change i n t he physi cal
i nput - out put r at i o.
devel oped,
physi cal
mat er i al
A number of di f f er ent f or ms of t he i ndex ar e
each one of use,
dependi ng on t he t ype of dat a avai l abl e.
For exampl e:
( 26)
P1 = aww' / Z'
wher e ( ' )
+ amm'
i ndi cat es an i ndex and P r epr esent s out put
pr i ce; w, wage r at es;
mat er i al s pr i ce;
Z,
pr oduc t i vi t y of l abor ;
aw, t he r el at i ve wage bi l l
r ol l s i n t he base per i od;
m,
or pay
and am, t he r el at i ve mat er i al s
cost s i n t he base per i od ( aw+ am = 1) .
Ot her f or ms ar e:
( 27)
P'
= m' Umo/ am! )
wher e ( o) and ( 1) r epr esent base
and gi ven year per cent ages.
Exampl es of t hi s may be har d t o come by, but an i mpr ovement of
mat er i al r equi r i ng l ess per uni t of out put coul d be mor e di f f i c ul t
t o assembl e or handl e so t hat savi ng on mat er i al s woul d be of f s et
by i ncr eased l abor t i me— or consci ous r esi st ance t o use of a new
mat er i al mi ght r esul t i n a " sl ow- down. "
15/ Dacy, Dougl as C. , " A Pr i ce and Pr oduc t i vi t y I ndex f or a Nonhomogeneous Pr oduct , " J our nal of t he Amer i c an St at i st i cal _Associ at i on^
14/
June 1964.
30
( 28)
v amm / ( V/ - aww' L' ) , wher e V i s t he money
P
val ue of out put and L i s t ot al
Thi s i ndex mi ght
pr ove usef ul
f or mi l i t ar y cons t r uc t i on or mi ght
i n est i mat i ng a pr i ce i ndex
have appl i c abi l i t y f or nonhomo-
geneous equi pment
pur chase.
i n t he pr ecedi ng
sect i on ar e equi val ent
I t i s of not e t hat
i ndexes 24 and 25
t o t he Dacy i ndex,
Dacy' s as sumpt i on of unchangi ng mat er i al - out put
E•
man- hour s.
if
r at i os i s adopt ed.
Recommended I ndex For ms
Of al l
t he f or ms descr i bed abov e, t he t wo t hat ar e r ecommended
as t he most pr act i cal
f or use i n devel opi ng pr i ce i ndexes f or def l a-
— -on of m11l ' .t ar y ex pendi t ur es ar e t he Laspevr es and Paasche I ndex es .
Whi l e t he ot her f or ms ar e of mer i t and i n cer t ai n r espect s ar e
super i or ,
t hese t wo f or ms ar e pr oposed f or t he f ol l owi ng r easons:
•
The t wo f or ms compl ement each ot her .
The pr oduct of t he
pr i ce i ndex of one f or m and t he quant i t y i ndex of t he
ot her equal s t he val ue r el at i ve.
•
Wei ght dat a ar e gener al l y avai l abl e ( especi al l y f or t he
Laspeyr es i ndex) .
•
The def l at ed val ue or quant i t y i ndex i s mor e r eadi l y
under st ood t han i s t he case of
t he Edgewor t h,
I kl £,
Khami s - Gear y f or mul ae.
Ii/
r< = r
1
0
;
Er . p. Q
110
( 25) become uni t y.
/ I r p. Q . i n ( 24) and Er . p Q / Zr . p Q
0 10 ‘
10 0
1*0 o
in
or
31
•
Compar i son of Paasche and Laspeyr es pr i ce i ndexes pr ovi des
anal ysi s of changes t aki ng pl ace i n pr oduc t mi x- - a f eat ur e
l acki ng i n t he ot her wi s e mer i t or i ous Fi sher ser i es.
For t hese r easons t he f ol l owi ng r ecommendat i ons as t o i ndex f or
mul ae ar e made:
•
Use t he Paasche f or m f or pr i ces wher e pos s i bl e, i . e. , wher e
wei ght dat a ar e avai l abl e i n det ai l
annual l y.
pr ovi de a Laspeyr es quant i t y ( const ant - dol l ar )
•
Use Laspeyr es pr i ce i ndexes wher e nec es s ar y .
•
I f r esour ces per mi t ,
cons t r uc t
ser i es.
pr i ce and quant i t y i ndexes
under bot h f or ms . The compar i son wi l l
of st r uct ur al
Thi s wi l l
changes and wi l l
per mi t an as sess ment
per mi t cons t r uc t i on of
Fi sher ' s i ndexes wi t h l i t t l e expendi t ur e of addi t i onal
r es our c es .
•
Exper i ment wi t h const r uc t i on of
•
Wher e i nput - pr i ce meas ur ement
i ndex es .
i s di f f i cul t ,
devel opment of wei ght ed mat er i al
r at e)
I k^
at t empt
and wage r at e ( sal ar y
i ndexes of s uppl i er s , es peci al l y i n t he case of
nonhomogeneous pr oduct s.
At t empt
t o est i mat e or meas ur e
pr oduc t i vi t y chanqe of suppl i er s and use expl i c i t l y as
des c r i bed.
YU
Ot her wi s e at t empt
t o devel op t he Dac. y-
t ype s er i es .
17/ The use of i n- house ( DOD) measur es i s di scus sed i n a l at er sect i on.
32
•
Th e
such
d evelopm en t
an
e a r ly
ls_ m ade
( see
r esearc h
d i v e r t
th e
be
sta g e
th e
c o s t -o f -l i v i n g
o f
developm en t
d e s c r ip tio n
u n d e rta k e n .
a t t e n t i o n
n e ar
o f
f u t u r e ,
from
a b o ve ),
Su c h
p u r s u it
h ow ever.
typ e
th a t
o th e r
o f
no
th an
m easures
is
recom m endation
e xp e rim e n ta tio n
o f
in d e xp .
t h a t
fu r t h e r
sh o u ld
a t t a i n a b l e
n o t
in
in
33
I I I .
Th e
p re c e d in g
p o r ta n c e -- even
m easure
1s
n ec e ssary
th e
c h oic e
p u t
p r ic e
w hich
o u tp u t
o u tp u t
p in
down
th e
d is c u s s io n
fe a s i b l e )
b e fo r e
(t o
t h i s
w hich
in p u t
c h a p te r
on
to
m easure
in p u ts
p ap er
in d e x
m easures
o f
c h oic es
o f
A t
t h i s
som ew hat
fro m
s ta g e ,
o f
in vo lve s
w ith
and
w hich
in p u t
and
o u t
fo r m u la e ,
fo r m u la tio n s
c o u ld
p ric e s
t h e i r
own
i t
d e s ir a b le
i s
im
fo r m u la .
in d e xe s ,
d e a l t
th e
p r ic e
in d e x
r e tu r n )
p r ic e
r a t i o s ,
from
m ore
an
o u tp u ts ,
D OD
s u p p lie r s
m e a s u re s ).
w i l l
num bers
o r
(p r o d u c t i v i t y )
c on c ept
s e le c tin g
(p u rc h a s e )
Th e
p r ic e
w h at
c o n c e rn in g
in p u t
be
used
(o r
to
p r ic e
to
a tte m p t
p r e c i s e l y .
Meani ng of Pr i ce
A.
Th e
q u e s tio n ,
q u e s tio n ,
"W hat
o f
th e se
In
in d u s tr ie s
is
q u e s tio n s
t h a t
"W hat
th e
to
be
In p u ts
m o ve
and
a l s o ,
th e
th ro u g h
lum ber
o r
board
a
f e e t ,
fo r m ,
th e re
i s
num ber
b u t
Th e
is
and
a
o f
th e r e
in
u s u a lly
o f
p h ys ic a l
is
o f
a
answ ered
f i r s t .
m easure
r e l a t i v e l y
m easure
becom es
stag e s
m ay
c o n t i n u i t y .
to
to
o r
fro m
a d o p te d .
th e
to
a r r i v e
In
th ese
p r in c ip a l
w h ic h
rough
lu m b e r,
o th e r
crude
to
l o g s ,
from
th e
s e r v i c e .
sim p le
be
i f
im portan c e
betw een
change
In
o n ly
p ro d u c ts
c o n n e c tio n
tim b e r
Th e
p ro d u c t
p ro c e s s in g
in te r m e d ia te
u n i t
be
p a r t i c u l a r
u n i t
s ta n d in g
can
c o n s id e re d
th e
i t
fo llo w e d
o u tp u ts :
p lyw o o d .
i s
l a r g e l y
a t
i n d u s t r i e s ,
u n it? "
p r ic e ? "
engage
fi n a l
c on c ept
th e
w ith
to
a
is
va r ie s
s e m ifin is h e d
to
a
(o r
m easures
p r o d u c t i v i t y
c o n ta in e d
m i l i t a r y
used
G EN ER A L
d e c id in g
in p u t-o u tp u t
e s tim a te
and
to
be
IN
n e c e s s i t y --o f
d e c is io n
in d e xe s .
c o u ld
e s tim a te
the
betw een
c o n ta in in g
to
s e c tio n
d e s ire d
On e
PRICING
in
tu r n
fi n i s h e d
lo g -m e a s u r e
s i t u a t i o n s — r e t a i l i n g ,
34
f or ex ampl e— t her e i s a physi cal
put of goods f r om whol esal er s,
addi t i onal
r esembl anc e among t he maj or i n
but
t her e i s al so such a var i et y of
ser vi ces per f or med t hat
vi ces t hat ar e most
" i n busi ness"
i mpor t ant .
i n cer t ai n r espect s i t i s t he ser
Si mi l ar l y,
t he " mi l i t ar y i ndust r y"
is
t o pr ovi de a ser vi ce t o t he Nat i on— whet her def ense,
vi ct or y or count er v ai l i ng f or ce.
Under t hi s vi ew,
pr i ces of al l
goods
and ser vi ces pur chased and consumed by DOD ar e t o be measur ed onl y as
pr oxi es at best f or t he pr i ce of ul t i mat e ser vi ce or out put .
Even
t he out put of shi ps f r om gover nment - owned and oper at ed shi pyar ds woul d
be vi ewed under t hi s appr oach si mpl y as t he i nt er nal
i nput .
pr oduct i on of an
Fr om t he poi nt of vi ew of pr i ci ng mi l i t ar y act i vi t y,
t her e ar e sever al
possi bl e choi ces,
each r equi r i ng di f f er ent
t hen,
pr i ce
i ndexes t o coi nci de wi t h each separ at e quant i t at i ve measur e:
1.
Nat i onal
Secur i t y
The quant i t at i ve concept her e deal s wi t h t he out put of mi l i
t ar y act i vi t y i n t er ms of secur i t y pr ovi ded,
t hr ough det er r ence,
vi ct or y,
or i mpr ovement
act i vi t i es pai d f or i n t he def ens e budget .
be br oader :
set t l ement . )
t i vel y,
whet her i n t er ms of saf et y
i n nat i onal
post ur e t hr ough
( The conc ept can of cour se
a di pl omat i c vi ct or y may be l ess ex pensi ve f or t he same
The quant i t y of secur i t y has not been measur ed quant i t a
but t hi s does not mean t hat
Pr i ce bei ng t he payment
t he conc ept
f or a uni t of
pr oduct ,
i s devoi d of meani ng.
t he at t empt
a pr i ce meas ur e woul d r equi r e t he i dent i f i cat i on,
t o const r uct
i sol at i on,
and s pec
i f i cat i on of one or mor e " pr oduct s, " so t hat a ser i es of dol l ar s pai d
per st andar d uni t of secur i t y coul d be devel oped.
I t has been cor r ect l y
35
poi nt ed out t hat t he number of " uni t s of secur i t y" woul d depend on:
( 1) t he ef f or t and ef f i ci ency of t he DOD and on t he quant i t y and
ef f ect i v eness of t he equi pment pur chased and used, and i f t he conc ept
wer e br oadened,
on ( 2) t he count er measur es t aken by pot ent i al
ver sar y gover nment .
f or exampl e,
ad
Pr i ce measur es of t hi s t ype woul d t end t o r i se,
when pr i ces of ser vi ces and pur chases r i se, when DOD
pr oduc t i vi t y f al l s,
when ef f ect i veness of equi pment f al l s,
or when
t he ef f ect i v eness of an adver s ar y gover nment ' s mi l i t ar y compl ex or
t echnol ogy i ncr eases so t hat r el at i vel y l ess U. S.
abl e per dol l ar of DOD budget .
r ough count er par t
secur i t y i s av ai l
Thi s ki nd of measur e mi ght f i nd a
i n t he pr i vat e economy,
i f physi ci ans'
ser vi ces
wer e pr i ced on t he basi s of cur e or pr event i on of speci f i ed ai l ment ,
i ncl udi ng i n t he consi der at i ons r el at i ve i ncr ease or decr ease i n
ef f ect i v eness and av ai l abi l i t y of sani t ar y f aci l i t i es.
i t i es of f i r e houses or chur ches mi ght al so be subj ect
anal ys es as f i r e hazar d or gener al
Such a quant i t y and pr i ci ng concept
at t he cur r ent st at e of t he ar t s.
wi l l
mor al
envi r onment
The ac t i v
t o si mi l ar
r ose or f el l .
i s vi r t ual l y i mpossi bl e t o meas ur e
For t hi s r eason,
l i t t l e at t ent i on
be gi ven t o t hi s appr oach i n t he di sc us si on of qual i t y c hange,
speci f i cat i on,
et c. ,
]_/ Di scussi on of
whi c h f ol l ows .
t hi s vi ew of medi cal car e pr i ci ng pr o and con, can be
f ound i n:
" Qual i t y Changes and I ndex Number s, " Mi l t on Gi l ber t , Ec o
nomi c Devel opment and Cul t ur al Change, Vol . I X, No. 3; " Qual i t y Change
and I ndex Number s:
A cr i t i que, " Zvi Gr i l i ches; " A Repl y, " Mi l t on
Gi l ber t , Mont hl y Labor Rev i ew, May 1962; " Pur e Pr i ce I ndexes, Qual i t y
Change and Hospi t al Cost s, " Leonar d W. Mar t i n, Amer i c an St at i st i cal
As soci at i on, 1966 Pr oc eedi ngs , and " Changes i n t he Cost of Tr eat ment
of Sel ect ed I l l nesses, 1951- 65, " Anne A. Sci t ovsky, Amer i c an Economi c
Rev i ew, December 1967, and " Cost s of Medi cal Tr eat ment :
Comment , "
Yor am Bar z el , Amer i c an Economi c Revi ew, Sept ember 1968.
36
2.
Speci f i c Resul t s f r om a Speci f i c Pur chase
Thi s i s t he so cal l ed " bang f or a buck" appr oach.
ci f i c pur pose of each i t em of compl ex equi pment or per sonnel
pur chased woul d be i dent i f i ed,
quant i f i ed,
The s pe
ser vi ces
and pr i ced accor di ngl y.
Thus,
quant i t y mi ght be def i ned as expl osi ve power ;
t he uni t of meas ur e
mi ght
be t he ex pl osi ve power t o dest r oy a speci f i c,
def i ned obj ect or
ar ea;
and t he pr i ce woul d be t he monet ar y out l ay f or equi pment and
per sonnel
t ask.
needed t o accompl i sh t he speci f i c,
def i ned,
st andar di zed
Pr i ce woul d r i se i f ef f i ci ency decl i ned or i f pr i ce of what ev er
quant i t i es of ex pl osi ve needed r ose.
i f uni t pr i ce ( per t on)
Pr i ce woul d t end t o f al l
of expl osi ve r ose,
new t ype coul d accompl i sh t he same t ask.
even
i f a l esser quant i t y of a
Anot her exampl e mi ght
be t he
dol l ar s needed t o cl ean ( or pai nt ) a st andar d bui l di ng.
Thi s t ype of i ndex can be di f f i c ul t t o cons t r uc t but i s not
necess ar i l y beyond hope of accompl i shment ,
l i mi t ed ar eas. —/
One way t o est i mat e t hi s meas ur e i s t o use i nput
pr i ce i ndexes t oget her wi t h mat er i al
per man- hour ) measur es,
I t i s,
of cour se,
par t i c ul ar l y i n cer t ai n
and l abor pr oduc t i vi t y ( out put
as shown i n t he sect i on on i ndex f or mul ae.
necess ar y t o be abl e t o meas ur e out put
meas ur e pr oduct i vi t y.
i n or der t o
Per haps cost ef f ect i v enes s st udi es woul d
as si st DOD i n t hi s ef f or t .
2/ The Feder al Hi ghway Admi ni st r at i on pr oduces a pr i ce i ndex f or a
mi l e of hi ghway by meas ur i ng cost changes f or " put t i ng i n pl ace"
excavat i on, conc r et e pavi ng, st r uct ur al conc r et e pavi ng, st r uct ur al
concr et e, r ei nf or ci ng st eel , and st r uct ur al st eel .
37
3.
I nput s
Thi s def i ni t i on of pr i ci ng r equi r es mer el y t hat t her e be
a concept of quant i t y f or t he goods and ser vi ces pur chased.
r equi r ed come cl oses t t o ( but ar e not
f ound on pur chase or der s and per sonnel
t he amount pai d f or a gi ven wei ght
of chemi cal ,
pai nt ,
wi t h)
r ecor ds.
t he pr i ces
The pr i ce woul d be
of expl osi ve or 100 gal l on dr um
or a wage- r at e.
ent er i nt o t he const r uc t i on of
i dent i cal
The dat a
Pr oduc t i vi t y change woul d not
pr i ce i ndexes,
al t hough pr oduct i vi t y
changes i n t he suppl yi ng company woul d i mpl i ci t l y af f ect t he i nput
pr i ce.
Al so,
hopef ul l y,
a change i n pr oduct ,
whi c h af f ect ed i t s ef f i ci ency,
woul d,
be deal t wi t h ex pl i c i t l y by means of a qual i t y- change adj us t
ment appl i ed t o t he pur chase pr i ce.
B.
Speci f i cat i ons
Af t er t he deci si ons on i ndex f or m and pr i ci ng concept ar e made,
t he sel ect i on of
pr oduct s and dr awi ng up of det ai l ed pr oduct
( ser vi ce)
y
descr i pt i ons can begi n.
The devel opment of det ai l ed pr oduct s pe
ci f i cat i ons shoul d be vi ewed as an ex t ensi on of t he t hi nki ng t hat
goes i nt o def i ni t i on of concept s.
The speci f i cat i ons car r y concept s
r el at i ng t o uni t of quant i t y and pr i ce i nt o act ual
pr act i ce.
Car e
l essl y dr awn speci f i cat i ons can negat e t he r esul t s of t he mos t
er udi t e
devel oper s of t he gui di ng concept s.
Because t he goal
i s t o measur e pr i ce change i t sel f ,
r at her t han
3/ Sel ect i on of a sampl e of pr oduct s i s di scussed i n a l at er chapt er .
38
a
c om b in atio n
u c t
(o r
r u le
o f
p r ic e
and
p r o d u c t-m ix,
be
as
th a t
d e s c r ip tio n s
o r
s p e c ific a tio n s
th e
c h a r a c t e r i s t i c s "
th e
o f
e f f e c t
w ou ld
in p u t
c h an g e,
in d e x
be
in d e x
Th is
e r a l l y
changes
b u t
th e
f o r
in d e x ,
h ow ever,
Th e
any
p r ic e
va r io u s
in
o f
m ig h t
be
in
s h o u ld
p r ic e
He re
a c c o rd in g
th e
case
q u a n t i t i e s ,
as
va r io u s
o m it
a g a in
o f
to
th e
Th e
in d e x
p ro d
g en eral
in c lu d e
a g a in ,
A
th e
" p r ic e
e xc lu d e
th e
s p e c i f i
w h e th e r
g ive n
as
volum e
th e
an
o u tp u t
in d e x
d id
fro m
o r
f a l l ,
th e
i f
fo r t h
q u a l i t y
w ould
n o t
c a te g o r ie s .
purchase
and
on
gen
(c a r l o a d ).
s e l l e r s
o f
back
s e c tio n
s e l l e r 's
v o lu m e s -o f-s a le
r i s e
s w itc h in g
a
lo n g
volum e
w ould
un der
h e l p fu l .
term s
c o n s ta n t,
m ig h t
t h i s
p o s s ib le .
th e
a t t r i b u t e s .
d isc u s se d
p r ic e
rem ain
p r ic e s
th e se
th a t
d i f f e r e n t l y ,
be
exam ple
s p e c ify
o r d e r
as
th a t
d e s ir e d .
w i l l
an
w ould
w r i t t e n
is
to p ic
in
in
p re c is e
n ec e ssary
d e s c r ip tio n s
d e te rm in in g
o r
is
s e r v ic e )
is
c a tio n s
i t
th e
an
change
A
b u y e r 's
s p e c i fi c a t i o n .
p u rc h ase r
betw een
Su c h
bought
c a r l o t
and
le s s -
p ric e s
d e l i v e r e d ,
t h a n -c a r l o t .
Fo r
m ig h t
th e
a n o th e r
rem ain
c o n s ta n t.
p u r c h a s e r ,
to
change
o r
f a l l
th e
as
h o w e ve r,
sou rc e
th e
th e
d is ta n c e
n o t
in c lu d e
e xa m p le ,
o f
o f
i m p l i c i t
I f
as
s e l l e r 's
th e
and
i n d e x ,
s e l l e r s
th e
s u p p ly ,
l a t t e r
th e
a
A
w ere
based
a t
fou n d
b u y e r 's
tr a n s p o r ta tio n
s u p p l i e r s .
d is ta n c e
a
va r io u s
i t
c h a r a c t e r i s t i c
in
m easure
va r ie d
f o r
d is ta n c e s
n ec e ssary
p r ic e
charge
s p e c i fi c a t i o n
on
th e
th e
o r
a d vis a b le
m ig h t
a c c o rd in g
l a t t e r
from
in d e x
s p e c i fi c a t i o n .
r is e
to
w ou ld
39
The det ai l ed speci f i cat i ons shoul d encompass mor e t han t he phys
i cal
descr i pt i ons.
Vol ume- of - sal e and di st ance have been ment i oned.
Ot her char ac t er i st i cs mi ght ,
di scount s,
i f appl i cabl e,
del i ver ed or f r ei ght on boar d ( F. O. B. ) ,
t ol er ances al l owed i f i mpor t ant ,
i f any,
st at e whet her net of
i nst al l ed or not ,
I n addi t i on,
wher e desi r abl e,
model
mi ght be l i st ed but onl y f or i dent i f i c at i on.
i s conc ept ual l y not
I t i s most l y a sel l er s'
t i al s.
guar ant ee- t er ms,
and any ot her f eat ur es whi c h woul d cause di f f er ent i al
quot at i ons.
but
uni t of measur e,
number or br and
Br and pr ovi des a gui de
vi ewed as a pr i c e- det er mi ni ng char act er i st i c.
devi ce t o set up ar t i f i ci al
pr i ce di f f er en
Wher e t her e ar e per t i nent di f f er ences among br ands,
speci f i c at i on shoul d show t hi s expl i ci t l y,
Nor mal l y,
t i me but must
be wat c hed car ef ul l y when model s change.
number hel ps t r ace t he pr oduct over
dev el opment
t he knowl edge and ski l l
ness of
model
of speci f i cat i ons i s dependent on
of a speci al i st .
t he pur pose or goal
t he
r at her t han t hr ough t he
br and name. - /
The successf ul
pr i ce
Thi s t ask depends on awar e
of t he pr i ce measur e and speci f i c
4/ An exampl e of a spec i f i c at i on of a pr oduct i ncl uded i n t he Whol e
sal e Pr i ce I ndex of t he Bur eau of Labor St at i st i cs i s:
" El ect r i c
mot or , a. c . , 250 h. p. at 277 r . p. m. , 3 phase, 60 cycl e, 2, 300 vol t s,
80 per cent power f act or , 50° C r i se; manuf act ur er t o user , f . o. b.
f ac t or y wi t h f r ei ght al l owed, each. "
Anot her exampl e f r om an Ar my
r esear ch and devel opment pr i ce i ndex i s:
" Semi conduct or di ode t ype
1N1169.
Di ode si l i con 0. 375 i nch di a. by 0. 750 i nch over al l di m.
2 t er mi nal s wi r e l ead t ype her met i c al l y seal ed, each. "
40
knowl edge of t he f unct i on,
Ther e i s,
al so,
qual i t y and per f or manc e of t he commodi t y.
a mat t er of j udgment
concer ni ng t he degr ee of speci f i ci t y
desi r abi e.
A r epor t by t he Nat i onal
Bur eau of Economi c Resear ch t o t he U. S.
Bur eau of t he Budget had t hi s t o say conc er ni ng uni t
of a r at her br oad cat egor y di vi ded by quant i t y)
pr i ci ng:
vs.
val ues ( val ue
speci f i c at i on
" The changi ng uni t val ues of a br oad cl ass of goods ( say
shi r t s or aut omobi l es)
r ef l ect bot h t he changes i n pr i ces of compar abl e
i t ems and t he shi f t i ng compos i t i on of l ower and hi gher pr i ced i t ems
. . . I t i s l ess obvi ous t hat one can er r i n t he di r ect i on of ex cessi vel y
f i ne spec i f i c at i on . . .
I t i s t r ue t hat t he f i ner t he speci f i c at i on
t he mor e compar abl e t he pr i ces and t her ef or e t he bet t er t he meas ur ement
of pur e pr i ce change.
But
t he i mmense cost s of ext r eme and geogr aphi cal l y
5/
uni f or m speci f i c at i ons ar e i gnor ed by t hi s vi ew. "
Dr awi ng spec i f i
cat i ons t oo t i ght may cause many br eaks i n ser i es ov er t i me as pr oduct s
change and may l ead i n t ur n t o numer ous est i mat es and adj ust ment s.
Judgment
i s r equi r ed t o bal ance t hi s pr obl em agai ns t
t he pr oduct - mi x
i ssue as soci at ed wi t h l oose speci f i cat i ons.
5/ ' t he Pr i ce St at i st i cs of t he Feder al Gover nment , " a r epor t of t he
Pr i ce St at i s t i cs Revi ew Commi t t ee of t he Nat i onal Bur eau of Economi c
Resear ch t o t he Bur eau of t he Budget , Hear i ngs bef or e t he Subcommi t t ee
on Economi cs St at i st i cs of t he Joi nt Economi c Commi t t ee, Congr ess of
t he U. S. , Januar y 24, 1961, p. 32- 33. See al so " Consi der at i ons on t he
Choi ce of Pr i ces or Uni t Val ues as Def l at or s f or t he Census Benchmar k
Pr oduct i on I ndexes, " Subc ommi t t ee on Pr i ces, I nt er agency Commi t t ee
on Real Out put , r epubl i s hed i n Revi ew of I ncome and Weal t h, Sept ember
1973, al ong wi t h an ev al uat i on by Rober t J. Gor don.
41
Ther e i s no poi nt
t hat
i n i ncl udi ng i nf or mat i on i n t he speci f i c at i on
has no bear i ng on pr i ce measur ement .
For exampl e,
col or or st yl e
woul d gener al l y not be appl i c abl e f or ci vi l i an pr oduct s,
mi ght be per t i nent f or camouf l age.
such as whi t e- wal l
t i r es,
mi ght
but col or
Some char act er i st i cs or f eat ur es,
have si gni f i cance f or a consumer ' s
ci vi l i an car but woul d pr obabl y be i r r el evant f or a mi l i t ar y i nput
i ndex.
C.
Qual i t y Change
The quest i on of qual i t y change as i t r el at es t o pr i ce ( and out put )
meas ur ement
i s cl osel y r el at ed t o t hat of spec i f i c at i on change.
i s a school
of t hought t hat woul d conf i ne qual i t y adj ust ment s t o t hose
changes whi ch came about t hr ough spec i f i c at i on change.
i abl y
adj ust
Ther e
They woul d i nv ar
pr i ce meas ur ement when t hese changes do occur .
Ot her s woul d
go beyond t hi s and make adj ust ment s even i n t he absence of spec i f i c at i on
chanqe,
i f a change i n some ot her pr oduc t cont r i but es t o t he ef f ec6/
t i veness of t he or i gi nal
pr oduct .
Under t hi s appr oach i mpr ovement s
i n t i r es woul d be mani f est
i n t he pr i c e i ndex f or aut omobi l es.
i mpr ov ement
l ead t o an adj ust ment
i n r oads mi ght
( or aut omobi l es,
per haps) .
Al so,
i n t he pr i ce of
t i r es
I t i s not al ways possi bl e t o set t l e t hese
di f f er ences of opi ni on becaus e i t i s qui t e l i kel y t hat t he demand f or
bet t er t i r es woul d have been even gr eat er had r oads not been i mpr oved.
To vi ew qual i t y change adj ust ment s as necessar y wi t hout
spec i f i c a
t i on change woul d be es sent i al l y i n accor d wi t h mi l i t ar y pr i ce
6/
Fi sher ,
Fr ankl i n M. and Shel l ,
Kar l ,
op. c i t . , p.
35.
42
meas ur ement
i n t er ms of nat i onal
secur i t y,
descr i bed above,
wher ei n
t he i ncr eased ef f ect i veness of t he enemy' s mi l i t ar y machi ne woul d
P. ^ s et
i n t he i ndex ( as a qual i t y decr ease)
t he i ncr eased ef f ec t i v e
ness of domest i c equi pment .
Wi t h t he var i ous concept s of pr oduc t i on and pr i ce change meas ur e
ment cont endi ng f or at t ent i on as goal s,
al l
i t i s not sur pr i si ng t hat not
changes i n pr oduct s or ser vi ces wi l l
be gr eet ed by ei t her pur chaser s
or i ndex maker s as qual i t y i mpr ovement s ( or det er i or at i ons) .
wi l l
f i nd new st yl i ng appeal i ng;
unmoved.
ot her s wi l l
obj ect or at
I n ot her i nst ances such subj ec t i ve f act or s,
of goods sol d at
r et ai l
may be i r r el evant
car s f or mi l i t ar y conveyance) .
. . j wever ,
( e. g. ,
l east be
even f or t he t ype
f l eet s of pass enger
t her e ar e a gr eat
number of
changes i n pr oduc t whi c h r ecei ve a cons ensus- - i mpr ov ed saf et y,
per f or mance,
Some
heal t h»
ec onomy of oper at i on— and r epr esent qual i t y i mpr ovement s
wher eas t hei r opposi t e r epr es ent s det er i or at i on.
Even i f t he change i n
t he pr oduc t or ser v i c e i s gener al l y accept ed as cont r i but i ng t o qual i t y
change,
however ,
t he met hod under l yi ng t he qual i t y adj ust ment may not
be gener al l y accept ed.
1•
Two Appr oaches t o Qual i t y Change
Di sagr eement
at t hi s poi nt may come l ar gel y f r om appr oachi ng
t he pr obl em f r om opposi t e ends of t he pr oduc t i on- c ons umpt i on cycl e.
The pr oduc t i on- or i ent ed vi ew woul d r ecogni ze as qual i t y changes onl y
t hose spec i f i c addi t i ons or del et i ons t hat
r equi r e t he use ( or r emoval )
43
of pr oduct i ve r esour ces i n t hei r cr eat i on.
The cons umer - or i ent ed vi ew
accept s changes t hat cont r i but e ( posi t i vel y or negat i vel y)
ut i l i t y,
wi t hout
enj oyment ,
economy- i n- use,
r egar d t o r esour ce use.
et c. ,
t o t he
of pr oduct s and ser vi ces
These di ver gent
f er ent t ypes of pr i ce measur es and di f f er ent
pur poses l ead t o di f
adj ust ment s f or qual i t y
change,
even when t her e i s agr eement t hat qual i t y has, i n f act , changed
7/
i n a speci f i c manner .
Choi ce of t he conc ept and i ndex f or m of t he
mi l i t ar y pr i ce i ndex or i ndexes does not i ncl ude a pr i ce i ndex t hat
deal s wi t h consumer pobl ems i mpor t ant t o t he i ndi vi dual
ci t i zen.
But some of
t he choi ces, whi c h t he compi l er of a mi l i t ar y
pr i ce i ndex mus t f ace,
r evol ve ar ound mi l i t ar y i nput pr i ci ng f r om t he
poi nt of vi ew of POD as a consumer .
Hence,
one or t wo of t he concept s
i n par t i c ul ar ( Nat i onal - Secur i t y and " bang- f or - a- buck"
cl ude,
consumer -
by i mpl i cat i on,
concept s)
i n
some of t he same choi ces as a cons umer or i ent ed
appr oach t o qual i t y c hange.
These t wo at t i t udes t owar d qual i t y change ar e exami ned i n mor e
det ai l
i n t he f ol l owi ng par agr aphs ,
af t er
whi c h some comment s ar e made
gr eat er l engt h can be f ound i n Deni son, Edwar d F. ,
" Theor et i cal Aspect s of Qual i t y Change, Capi t al Consumpt i on, and
Net Capi t al For mat i on, " Pr obl ems of Capi t al For mat i on, St udi es i n
I ncome and Weal t h, Vol . 19. , pp. 215; and Gr i l i ches, Zvi and Mi l t on
Gi l ber t , op. c i t ;~ and " Mi nut es of t he Commi t t ee on Cons umer and
Whol es al e Pr i ces, " Busi ness Resear ch Advi sor y Counci l t o t he
Bur eau of Labor St at i st i cs , Febr uar y 18, 1964.
TJ Di scussi ons at
44
on t he i nci dence of t he qual i t y change adj ust ment .
An exami nat i on of hypot het i cal
f or Qual i t y Change,
dat a i n Exhi bi t
III-l ,
may cl ar i f y some of t he choi ces.
Adj ust ment
I n t he exampl e
pr i ce and def l at ed val ue measur es ar e der i ved f or a l ar ge t r ac t or or
ot her i t em of capi t al
equi pment .
I t i s assumed t hat t he i t em sol d i n
Per i od 2 has been i mpr ov ed i n t hat i t can move t wi ce as much ear t h
i n a gi ven t i me,
compar ed wi t h t he abi l i t y of t he model
i n Per i od 1.
I n Appr oaches 1 and 2 i t i s assumed t hat t he i mpr ov ement i s made wi t h
out addi t i onal
cost of pr oduct i on ( unl i kel y per haps i n t hi s exampl e
but possi bl e f or ot her t ypes of pr oduct ) .
t hat t he i mpr ov ement i s made at a cost .
I n Appr oach 3 i t i s
I n ef f ect ,
assumed
t he per f or mance
appr oach t r eat s each new machi ne as t he equi v al ent of 2 ol der machi nes.
Thi s al l ows pr i ce t o f al l
doubl es;
50 per cent .
But
i nput ,
and pr oduc t i vi t y r emai ns unchanged.
i . e. ,
of machi nes,
Thi s poi nt shoul d be bor ne
i n mi nd when adj ust i ng i nput pr i ces f or qual i t y change based on per
f or mance. . I f t hi s t ype of pr i ce i ndex i s t hen used as a def l at or t o
obt ai n an out put i ndex, whi c h i s i n t ur n used t o est i mat e pr oduc t i vi t y
change,
a pr obl em of def i ni ng away t he pr oduc t i vi t y changes ar i ses.
For t hi s r eason qual i t y change adj ust ment s,
changes,
meas ur ed by per f or mance
ar e unsui t abl e f or meas ur ement of changes i n pr oduc t i vi t y
of c api t al .
45
EXHI BI T I I I - l — PRI CE I NDEX ADJUSTMENT FOR QUALI TY CHANGE
Basi c Dat a
Per i od 1
Pr i ce as quot ed - - - - - - - - - - - - - - - - Val ue of pr oduct i on - - - - - - - - - - - - Per f or mance i n gi ven t i me - - - - - -
Per i od 2
10,000
10,000
$
$
$ 40 M
60 MCU yds.
$ 40 M
120 MCU yds.
Appr oach 1 - Pr oduct i on or i ent ed - no cost i ncr ease - no adj ust ment
Pr i ce I ndex - - - - - - - - - - - - - - - - - - - - Def l at ed val ue - - - - - - - - - - - - - - - - - I ndex - - - - - - - - - - - - - - - - - - - - - Pr oduc t i vi t y of capi t al ( I ndex) —
100
100
100
Appr oach 2 - Per f or manc e or i ent ed - no cost
Pr i ce I ndex - - - - - - - - - - - - - - - - - - - - Def l at ed val ue - - - - - - - - - - - - - - - - - I ndex - - - - - - - - - - - - - - - - - - - —
Pr oduct i vi t y of capi t al ( I ndex) —
$ 40 M
i ncr ease - pr i ce adj ust ed
100
$ 40 M
50
$ 80 M
100
100
Appr oach 3 - Pr oduct i on or i ent ed - $500 cost
Pr i ce I ndex - - - - - - - - - - - - - - - - - - - - Def l at ed val ue - - - - - - - - - - - - - - - - - I ndex - - - - - - - - - - - - - - - - - - - - - Pr oduc t i vi t y of capi t al ( I ndex) —
100
100
200/100 = 200
$ 40 M
100
$40 M
100
100
200
200/200
=
100
i ncr ease
95
$ 42
M = 40/ . 95
105
200/ 105 = 190
46
2.
Rat i onal e f or t he Two Appr oaches
The per f or mance or cons umer - or i ent ed appr oach t r eat s pr oduct s
as desi r abl e f or t he ser vi ce,
Fr om t hi s poi nt of
sat i sf ac t i on or ot her ut i l i t y t hey r ender .
vi ew even capi t al
equi pment of t he above exampl e,
ut i l i t i es or abi l i t i es.
ment
goods,
such as t he ear t h- movi ng
ar e deal t wi t h as pr i mar i l y packaged
Fr om t hi s i t f ol l ows l ogi cal l y t hat any i mpr ov e
i n ser vi ce i s gi ven i t s f ul l
ef f ec t
( one machi ne i s t r eat ed as
t wo i f abi l i t y doubl es) .
For cons umer goods,
t hi s l i ne of
r easoni ng
has consi der abl e appeal ,
es peci al l y f or t he cons t r uct i on of cost of
l i vi ng i ndexes.
The pr oduc t i on- or i ent ed concept ,
as cont r i but i ons t o,
or consumer s of ,
on t he ot her hand,
r esour ces.
t r eat s pr oduct s
One of t he obj ect i ves
of t hi s appr oach i s t o at t ai n cons i st ency among dat a on pr i ce,
t i on,
l abor and capi t al - pr oduct i v i t y.
Al l
t hese measur es shoul d be
cons i s t ent wi t h one anot her and wi t h t he sy st em of nat i onal
Accor di ngl y,
account s.
t he qual i t y change i n ear t h- movi ng equi pment woul d be
meas ur ed by t he r esour ces used t o i mpr ove per f or mance.
t wo t ypes of capi t al
I t f ol l ows t hat
goods cost i ng t he same ar e consi der ed t o embody
t he same amount of capi t al ,
r egar dl ess of
t hei r pr oduct i ve abi l i t y.
I t i s i mpor t ant t o not e t hat bot h appr oaches accept
manc e as a qual i t y i mpr ovement ,
i ncr eased per f or
i f ac compani ed by a cost change;
each appr oach woul d handl e t he adj ust ment di f f er ent l y.
of a cost
pr oduc
but
I n t he absence
change t he pr oduc t i on- or i ent ed appr oach woul d not adj ust
f or qual i t y c hange.
47
I n many i nst ances a par t i cul ar speci f i c at i on change woul d be
j udged t o be a qual i t y change under ei t her appr oach.
pr obabl y be r ej ect ed under t he r esour ce use concept s,
St yl e woul d
even t hough
8/
addi t i onal
r esour ces wer e used.
Some changes i n component s mi ght
be ac cept ed by t he r esour ce- use conc ept but r ej ect ed by t he consumer or i ent ed appr oach,
3.
i f t hey di d not cont r i but e t o per f or mance.
Some I nconsi st enci es
Bot h appr oaches have some i nconsi st enci es i n pr act i ce.
has been obser ved above,
makes use of
at e,
As
t he use of per f or mance t o make t he adj ust ment ,
t he pr i ce i ndex as a def l at or of capi t al
goods i nappr opr i
i f t he cons t ant - dol l ar ser i es i s i n t ur n t o be used as t he deno
mi nat or of a capi t al
pr oduc t i vi t y measur e.
t he ver y val ue f or whi c h a meas ur ement
The adj ust ment
i s needed.
r emoves
Thi s f ai l i ng i s of
cons i der abl e i mpor t ance i n cons i der i ng any possi bl e pr oduc t i vi t y ad
j ust ment of
i nput pr i ces of mi l i t ar y weapons.
f ect i veness mi ght be negat ed,
i f t he adj ust ment
t i veness wer e made on t he basi s of
I nst ead,
t he addi t i onal
At t empt s t o st udy ef
f or i ncr eased ef f ec
" how much mor e bang- f or - t he- buck ?
cost of t he spec i f i c at i on change t hat
l ed t o
t he " bi gger bang" woul d be t he bet t er choi ce.
The r el i ance on r esour ce- use concept s can al so have pi t f al l s.
For i nst ance,
What happens i f a pr oduct
i s i mpr oved t hr ough subs t i t ut i on
8/ Tr i m packages f or aut omobi l es have been t r eat ed as qual i t y changes
~ i n t he Bur eau of Labor St at i st i cs Whol es al e Pr i ce I ndex when made
st andar d, i f pr evi ous l y sol d as opt i onal s.
48
of a new mat er i al
or component t hat cost s l ess r at her t han mor e? I f
t he cost decr ease i s used t o make t he adj ust ment ,
t hi s i s equi val ent
9/
t o j udgi ng t he qual i t y change as a det er i or at i on.
Some advocat es
of t he r esour ce- use appr oach advocat e an adj ust ment based on cost
even i n t hi s case.
I n ef f ect ,
quest i on i s i r r el evant ;
al l
t hey say t he ent i r e qual i t y- change
t hat shoul d be asked i s whet her a s pec i
f i cat i on change i s ac compani ed by f ewer r esour ces.
had gener al
accept ance,
Thi s vi ew has not
however .
Deci si ons on whet her t o adj ust pr i ce dat a ( and,
qual i t y change af f ect not onl y t he pr i ce i ndex but
( const ant dol l ar )
t he choi ces.
i nput and out put
Shoul d adj ust ment
val ues.
of
t he addi t i onal
f or
t he der i ved r eal
Some exampl es i l l ust r at e
f or an i mpr ov ement i n el ec t r i c l i ght
bul bs, whi ch ext ends t hei r l engt h of l i f e,
some f unct i on of
i f so how?)
be made on t he basi s of
l umens or on t he basi s of cost - pr i ce
t he added f eat ur e? Shoul d changes i n mot or s be meas ur ed by changes
i n hor s epower r at i ngs or by cost ? The answer s t o t hese quest i ons depend
on whi c h appr oach t o quant i t y and pr i ce i s appr opr i at e t o t he over - al l
goal ,
as wel l
as on what
i s possi bl e.
9/ The Bur eau of Labor St at i st i cs had t o make such a choi ce when bet t er
bal l bear i ngs wer e subs t i t ut ed f or l ess ef f ect i ve but hi gher - c os t
bear i ngs. Rat her t han t r eat t he spec i f i c at i on change as a qual i t y
dgt er i or at i on, no adj ust ment was made; and pr i ces bef or e and af t er
t he change wer e compar ed di r ect l y. Thi s at l east gi ves " par t cr edi t "
t o t he qual i t y i mpr ovement .
49
4 .
Re c o n c ilia tio n
An o th e r
When
th e
s e l l
on
be
th e
taken
m ethod
as
im proved
sam e
as
th e
has
are
e va lu a tio n
w ith
o ld
m arket
and
w ith
i t i v e
can
item s
o f
o f
th e
va lu e
o f
m e r i t ,
w here
s u b j e c tiv e
m odels
r e a s o n ,n e w
th e
sam e
because
i terns.
o f
in
f o r
item s
o ld
a
Th e
and
c h an ge.
new
m ay
Th is
in s ta n c e s
e q u ip m e n t,
and
m odels
m arket
are
o f
a
th e
such
c on c ept
w here
such
(c o n s u m e r
e va lu a tio n
u n d e r lyin g
econom y;
v a r i e t y
d i f f e r e n t i a l
c o m p e titive
th e
o f
p la c e .
c o n s id e r a tio n s ,
o th e r
a v a i l a b l e ,
fr e e
and
p r ic e
In
m arket
e a r l i e r
q u a l i t y
m any
e a r l i e r .
a
th e
i n s ta n c e ).
v a l i d
c ite d
m ethod
q u a l i t y
o f
in
and
th e
o r
th e re
unique
m odels
m ay
are
e f f o r t
be
Th e
o f
p r ic e
down
as
is
h ig h ly
th e
in
c om pet
a v a i l a b l e ,
n o t
p r a c t i c e ,
are
are
q u o ta tio n s
o f
is
c le a r
th ese
e q u a lly
m odels
d i f f e r e n t i a l
to
in v o lv e d .
am ong
u s u a lly
am ong
s e l l e r s
d i f f e r e n t i a l
in
goods
p r ic in g
c o m p e titio n
h e lp .
th e
f a l l s
m i l i t a r y
o ld
n o t
u s in g
change
Pr ic e
t h a t
does
o f
equipm ent
m a rk e t.
fa c t
be
p r e v a ils
i n t e r e s t
one
Th e
f o r
as
g e n e r a lly
a ls o
th e
th e
m odels
w e ll
th e
i t s
the
t h i s
u se d .
h eavy
s id e r a b le
10 /
o f
as
tim e ,
to
and
m easure
econom ics
Ho w e ve r,
m easure
p ro d u c t
sam e
eq u ipm en t
be
d e c is io n
th e
s i t u a t i o n
m ethod
th e
a t
w ou ld
th e
s h i f t s
Pla c e
m a rk e t
new
p lac e
M a rk e t
d e te r io r a te d )
p e rfo rm a n c e ,
e a r th -m o vin g
l i n e
(o r
im p o rta n t
o f
th e
vie w p o in t
c o n s id e ra b le
s t y l e ,
o f
is
as
th e
e s p e c ia lly
Item s
i n fl a t e d
con
g o o d s ._ F o r
a v a ila b le
th e r e fo r e
c lo s e -o u t
o f
when
p r ic e s
in
in v e n to r ie s
la c k i n g .
o f
th e se
o f
on
o ld
o ld
cases
50
Secondl y,
many sel l er s use model
i ncr ease pr i ces.
Whi l e new f eat ur es may r epr es ent
pr i ces ar e al so r ai sed,
change.
changeov er t i me as an oppor t uni t y t o
t he di f f er ent i al
i mpr ovement s,
if
woul d ov er st at e t he qual i t y
Anal ogous r eas oni ng appl i es i n t i mes of decl i ni ng pr i ces.
Thi r dl y , t he under l yi ng t heor y of compet i t i v e pr i ces i s based on t he
as sumpt i on of f r ee i nf or mat i on concer ni ng t he pr oduct .
For t hi s
as sumpt i on t o hol d t r ue woul d r equi r e a hi gh degr ee of consumer sophi s
t i cat i on and access t o knowl edge.
t he pr i ce di f f er ent i al ,
duct ,
I t may be r eas onabl e t o assume
f or exampl e,
of t wo var i et i es of a f ood pr o
one wi t h an addi t i ve nut r i t i onal
or pr eser vat i ve,
t o r ef l ect
t he consumer ' s j udgment of qual i t y change,
i f t he addi t i ve ac t ual l y
per f or ms.
however ,
I f t he addi t i ve i s det r i ment al ,
t he consumer ' s
mar k et - pl ace deci si on woul d have been based on unwar r ant ed f ai t h. — ^
Had t he f act s been known,
t he pur chase mi ght
have been made onl y at
a r educed r at her t han hi gher pr i c e— or not made at al l .
5.
I nvol unt ar y Pur c has es — For ced Subst i t ut i ons
For ced or i nvol unt ar y subst i t ut i ons pose a concept ual
pr ob
l em.
These s i t uat i ons— unl i ke t hose descr i bed i n t he pr ecedi ng s ec
t i on,
wher e new and ol d i t ems ar e sol d s i mul t aneous l y— may i nvol ve:
( a) r epl ac ement of ol d model s wi t h new,
wi t h no t i me over l ap;
( b) di sc ont i nuance of a cl ass of pr oduct or ser vi ce;
act i ons r equi r i ng cost l y pr oduct changes,
-11/
or
or
( c) l egal
whi c h may benef i t soci et y
Fur t her r eason t hat br ands have not ( i n t he absenc e of s ubs t ant i
at i on) been used as qual i t y det er mi nant s i n pr epar at i on of spec
i f i cat i ons.
51
but may or may not benef i t t he i ndi vi dual
cat egor i es wi l l
a.
pur chaser .
These t hr ee
be exami ned separ at el y,
of Model s
Repl acement
Thi s subj ect
has r ecei ved some at t ent i on abov e i n c on
nect i on wi t h t he quest i on of whet her t o adj ust a pr i ce i ndex f or qual i t y
change on t he basi s of per f or manc e or on t he basi s of cost of r esour ces
used t o br i ng about
Ei t her met hod r est ed on t he
t he qual i t y change.
assumpt i on t hat t he change was desi r ed by t he pur chaser .
t hi s i s not so?
The quest i on does not
Gr ant ed i t does,
pur chaser s?
Some exampl es can be dr awn f r om t he aut omobi l e i ndust r y.
i ndust r y i nnovat i ons ar e of t en sol d f i r st as opt i onal
t hi s case t he cust omer has a choi ce,
and i t
how many pur chaser s assess t he opt i onal
buy
a t
m ay
becom e
w ou ld
th e
h ave
any
added
ite m
th e re
is
th e
view
p r ic e
and
purc hased
i f
in
th e
a
a
La t e r ,
an
th e
ite m
c o n tin u e d
o f
th e
o r d e r
to
o b ta in
m ark e t
th e
c u s to m e r -o r ie n te d
in c r e a s e ,
re p re s e n ts
t h a t
i f
th e re
even
added
is
p r e v io u s ly
o f
had
is
th e
b e in g
num ber
v i e w --
h o ld s
though
th e
q u a n t i t y
on
On e
t h a t
sam e
and
th e
no
s o ld
In
o f
to
g en eral
m ay
o f
th e se
f o r
who
be
purc hase
fe a tu r e
p r ic e
o p tio n s
p erson s
sc h ool
f o r
enough t o
as
o p tio n a l
fo rc e d
a u to m o b ile .
agreem ent
equi pment .
f eat ur e as usef ul
item s
I n t hi s
i s possi bl e t o det er mi ne
e s tim a te
p a r t
p r ic e
m a rk e t
h o ld s
o ffe r e d .
s ta n d a r d ,
e ve n t
p r i m a r i l y
o f
but
i f i t i s not deemed wor t h t he pr i ce by si gni f i c ant number s of
pot ent i al
In
if
i nvol ve a di sput e over whet her
t he change r epr esent s a qual i t y i mpr ovement .
what
But what
m ade.
th e
th o u g h t-persons
th e
in c r e a s e .
w o rth w h ile
r e s t
An o th e r
n a tu re
52
o f
th e
added
m easured
e q u ip m e n t,
perhaps
b y
d u c tio n -o r ie n te d
W h ile
a
new
e ve r
i t
m anner
i t
p r ic e
fe a tu r e
a t
th e
buy
to
custom ers
be
c o s t
o f
argu ed
t h a t
w h en ever
o f
change
added
resou rc es
m arket
t hat
t he
Bureau
of
q u a l i t y
in c re a s e
resou rc es
f o r
w an t
f o r
used
o r
som e
e ve ry
u n der
La b o r
p u rc h a s e r,
th e
p r o -
fu r t h e r
w ou ld
be
n o t
a d j u s te d .
w ish
o ffe r e d ,
b a s is
w ith o u t
p u rc h a s e .
( B LS )
in
i t s
e x tr a
th e
u t i l i t y
Th o s e
who
m easure
b a s is
o f
a s s e s s in g
In
th e
assess
c h an ge.
th e
buy
sh ou ld
n e ve rth e
to
on
I t
w h a t
who
la c k in g
change
to
b u t
been
m odels
in c lu d e s
a d j u s t m e n t s
i t s e l f .
fo rc e d
S t a t i s t i c s
be
th e
change
a r t i c l e
q u a l i t y
undergoes
who
w ou ld
when
o th e r
m odel
b a s ic
has
fe a tu r e s
th e
i t
th e
in fo r m a tio n
new
th ose
w hich
a
im p rovem en t,
e s tim a te d )s h o u ld
a t
th e y
assess
t he
q u a l i t y
in c re a s e
i f
p r ic e
be
p r ic e
Ge n e r a l l y ,
a
vie w .
m ay
a
m ust
added
in v o l v i n g
r e f l e c t
le s s
i s
th e
c o u ld
fe a tu r e
th e re
th e
case
W holesale
p e rfo rm a n c e ,
th e
o f
and
p a r t
o f
au tom ob ile s
Co n s u m e r
Pr i ce I ndexes assessed t he f or ced pur chase component of opt i ons made
st andar d on t he basi s of number of car s sol d wi t h and wi t hout
f eat ur e i n quest i on.
t he
Thes e f i gur es wer e used as wei ght s t o est i mat e
t he pr i ce change and qual i t y change component s.
b-
Di scont i nuance of a Cl ass of Goods or Ser vi ces
The concept s her e ar e r el at ed t o t hose gover ni ng t he
i nt r oduc t i on of new model s,
par t i c ul ar pr oduct
but
t he ci r cumst ances di f f er .
l i ne i s di scont i nued,
a
f or ci ng cust omer s t o pur
chas e a mor e or l ess ex pensi ve l i ne or do wi t hout .
can be t aken as an exampl e.
Her e,
Tel ephone ser vi ce
When t he t en- par t y ser vi ce was avai l abl e,
al ong wi t h t wo- par t y and pr i vat e ser vi ce,
cust omer s had pr es umabl y sor t ed
53
t hemsel ves out on t he basi s of t he di f f er ent i al
and i t s ut i l i t y.
pr i ce of each ser vi ce
Then ( l et us assume) wi t hout changi ng t he pr i ce of
t wo- par t y or pr i vat e l i nes t he t el ephone company di sc ont i nued t he
t en- par t y l i ne.
Di d t he di f f er ence bet ween t en- par t y and t wo- par t y
ser vi ce r epr es ent a pr i ce i ncr ease?
One ar gument hol ds i t does not
because ( a) t he company changed no r at es,
i . e. ,
r ai sed no pr i ce schedul e,
and ( b) t wo- par t y l i nes ar e bet t er t han t en- par t y,
i n pr i ce r epr esent s a qual i t y change.
and t he di f f er ent i al
The count er ar gument
hol ds t hat
t her e was a pr i ce i ncr ease because ( admi t t i ng t hat t wo- par t y l i nes ar e
bet t er )
t he ser vi ce was f or ced and not want ed.
i t had l ess ut i l i t y t han t he pr i c e di f f er ence,
Hence,
t o t he pur chaser ,
as evi denced by t he
cust omer ' s ear l i er r ej ect i on of t he t wo- par t y ser vi ce.
As i n ot her mat t er s of pr i ci ng,
t her e i s no uni que answer .
A
pr i ce i ndex t hat f ol l ows cost - of - l i vi ng or cons umer - or i ent ed concept s
mi ght wel l
cr eases.
consi der f or ced subst i t ut i on of t hi s ki nd t o be pr i c e i n
Pr oduc t i on- or i ent ed i ndexes woul d not cons i der t hi s a pr i ce
change f r om t he sel l er ' s vi ewpoi nt .
The i ncr eased ser vi ce woul d be
bal anced by i ncr eased pr i ce ( and pr esumabl y cost ) .
c.
Legal l y Requi r ed Change i n Speci f i cat i ons
Requi r ement s by var i ous gover nment aut hor i t i es t hat
speci f i c i t ems of equi pment be added t o commodi t i es t o pr omot e heal t h
or saf et y have r ai sed quest i ons si mi l ar t o t hose r ai sed i n t he t wo
pr ecedi ng sect i ons.
benef i t t he pur chaser
a choi ce,
Thes e added i t ems ar e of t wo ki nds:
t hose t hat
( whet her he woul d have pur chased t hem i f gi ven
i s anot her mat t er )
and t hose t hat
have l i t t l e or no di r ect
54
appeal
to
th e
l a r g e ,
in c lu d in g
q u irem e n ts
s io n
o f
Th is
Th e
h ave
On e
w ay
o f
th e
new
p r ic e
o f
th e
u t i l i t y
u t i l i t y
to
o r
th e
th e
p r ic e
th e
answ er
in d e xe s ,
tw o
c om m odity;
th e
s e c o n d ,
q u e s tio n ,
be
c o n s id e re d
te le p h o n e
s e r vic e
th e
th e
as
q u e s tio n ;
answ er
b y
a
is
is
som e
on
as
and
b u ye r
in
th e
In
i n c l u
non
is
has
typ e
o f
o r
as
is
to
ye a rs
view
s e r vic e
f o r
flo w
som e
o th e r
b e n e fic ia l
e x tr a
p r ic e
a d d itio n a l
(c om p are
w ith
Th e r e
q u e s tio n s
c o n c e p t,
en
com parable
ju d g ed
a b o ve ).
m ost
re c e n t
th e
an
th e
Th e s e
change
th e
in c re a s e
d e s c rib e d
c o n c e rn in g
paym ent
w h e th e r
th e
p r ic e
b u t ,
depends
w ith
f i r s t ,
com m odity
governm ent
th e n ,
o r
r e
h a za r d
fo r c e d —
fr e q u e n t
th e
th e
Th e
o f
f i r e
c on sen su s.
s p e c i fi c a t i o n
p a r t s -
th e
o f
m ore
f o r
in c r e a s e ,
to
degree
and
o f
c h an g e,
paym ent
by
change
be
g ro u n d e d ,
w here
though
a t
in d e xe s .
sam e
c la s s
d e s ire d
sh o u ld
o f
th e
be
m ig h t
s u b s t i t u t i o n
t e x t i l e s ,
q u a l i t y
p r ic e
o f
and
c onm un ity
former
th e
c h an g e— even
a
th e
equipm ent
ve h ic le s
im p o rta n t
th is
is
th e
s e r vic e
s u b s t i t u t i o n
ve rs a l
p r i c e ,
q u a l i t y
w ith
m ore
a t
o f
g o ve r n m e n t-fo r c e d
c o n s is tin g
c om m unity.
a
th e
b e n e fi t
e l e c t r i c a l
in flam m ab le
in
m et
becom e
as
o f
to
Ex a m p l e s
re p re s e n t
o f
n o t
from
consum er
hence
f o r
lo o k in g
o ld
to
typ e
has
deem ed
s p e c i fi c a t i o n
c a lle d
changes
w ith
o f
a re
m i l i t a r y
f o r
h e ld
o th e r
vir o n m e n t,
in
t e x t i l e s
been
a d ju stm e n t
item s
b e lts
typ e
b u t
p u rc h a s e r.
some
s a fe ty
g e n e r a lly
th e
t h a t
c o m b u stib le
h ig h .
p u rc h a s e r
g o als
i s
b e n e f i t ,
fo rc e d
no
u n i
d e a lin g
and
use
to
w ith
o f
in d e x.
B e fo re
a tio n s
g e n e r a l i zi n g
in vo lve d , i t
w ou ld
fu r t h e r
on
th e
be
to
r e c a p i tu la te
w e ll
va rio u s
c on c eptu al
som e
c o n s id e r
th in k in g
th a t
55
act ual l y t ook pl ace i n connec t i on
wi t h t wo gov er nment - r equi r ed
spec i f i c at i on changes t o meet envi r onment al
r equi r ement s:
devi ces on aut omobi l es and l ow- s ul phur f uel
oi l .
( 1)
The Emi s si on Cont r ol
ant i - s mog
Exampl e
Ant i - pol l ut i on devi ces have been r equi r ed by
Feder al
l aw,
l aw on new aut omobi l es and t r ucks si nce 1967 and by Cal i f or ni a
some year s ear l i er ;
and gover nment pr i ce i ndexes have been ad
j ust ed f or qual i t y change.
U. S.
Gover nment
I t was not unt i l
r evi ewed t he deci si ons.
pr es ent ed her e because:
1970,
Some of
( 1) envi r onment al
however ,
t hat t he
t he di sc us si on i s
cr i t er i a may appl y t o some
ci vi 1i an- t ype goods pur chased by t he mi l i t ar y j and ( 2) some mi l i t ar y
pur chase pr i ces may i ncl ude payment
sake,
pl us an addi t i onal
payment
f or t he good val ued f or i t s own
f or ut i l i t i es not di r ect l y r el at ed
t o t he mi l i t ar y need f or t he good i t sel f .
The ar gument s agai ns t adj ust ment
( and t hus f or t r eat i ng t he l i st
pr i ce i ncr ease upon i nt r oduc t i on as a genui ne pr i ce i ncr ease)
hol ds
t hat :
•
The
buy er does not benef i t — ot her s do.
Most buyer s woul d
not pur c hase t he new f eat ur e vol unt ar i l y.
•
Ac cept ance of t he devi ce as a qual i t y i ncr ease woul d ov er
compensat e becaus e of
f ai l ur e t o penal i ze ( t ake a pr i ce
i ncr ease, cet er i s par i bus ) ear l i er , when t he env i r onment
det er i or at ed.
•
The added pr i ce oc cas i oned by t he devi ce i s s i mi l ar t o a
t ax i mposed by gover nment wi t h t he pr oceeds used ent i r el y
t o pr oduc e and i nst al l
t he devi ce.
56
•
Pr ic e
in d e xe s
(e s p e c i a l l y
t r a d i t i o n a l l y
o f
s o c ia l
n o t
c h oic e
m easured
goods
s e r vic e s
e n te rs th e
th e
o f
fo rm
o th e r
sm og
s a le s
typ es
o f
d e vic e s
p ro d u c t
good
c o sts
w ou ld
to
o r
b u t
c o in c id e
•
resou rc e
To
r e f l e c t
w o u ld ,
p a r t
f o r
Th e
(h e n c e
in
a t
a
l e a s t ,
t r e a t
o f
s c a lin g
in
fa v o r
down
o r
o f
c o s t
r e q u ire m e n ts ,
are
c onsum ption
o f
u s e -r e la te d
such
im bedded
i d e n t i f i e d .
" Th e
p r o v is io n
w ith
i t s
p r i v a t e
som e
fe e s ;
as
in
in
a n t i -
fi n a l
change
o f
a
c o s t
in
s o c ia l
in
term s
12/
d e vic e
th e
s o c ia l
c o s t -o f -l i v i n g
argu m en ts
f o r
e f f e c t ,
and
th e
a n ti-s m o g
o r
h ave
s p e c i f i c a l l y
w ith
r e q u i r e m e n t s ."
th e
In d e x)
Th e
In d e x
ta xe s
be
*
o f
Pr ic e
c h im n e ys,
a s s o c ia te d
n o t
consum er.
le g a l
c an n o t
Pr ic e
a v a i l a b i l i t y
th e
e xc is e
fa c to r y
p ric e s
s o c ia l
and
Co n s u m e r
th e
Co n s u m e r
ta xe s
on
th e
p r ic e
c o s t.
in d e x
as
b u t
ta k in g
an
e lim in a tin g
a
q u a l i t y
in d e x
Th is
n o t
as
a
m e asu re,
in
is
a
v a l i d
o b j e c tiv e
f o r
a
p r ic e
in d e x.
a d ju stm e n t
th e
im provem ent
l i s t
f o r
p r ic e
q u a l i t y
change
in c re a s e s )
are
t h a t :
•
Th e
in
purc hase
th e
h ave
sam e
va lu e
com m unity.
when
12 /
th e y
P o p k i n ,J o e l ,
O ffi c e
o f
o f
an
sense
to
Th e
w ere
and
t h a t
reason
few
o p tio n a l
Co s ts
Li v i n g
d e vic e
c o n tr ib u tio n s
i n d iv id u a ls
" P o l l u t i o n
Pr ic e s
a n ti-s m o g
as
and
to
r e s p o n s ib le
consum ers
i s
b e n e fits
t h a t
th e
C o n d i ti o n ,
t h i s
th e
com m unity
m em bers
purc hased
is
Co n s u m e r
Bureau
p u rc h ase r
one
c la s s
Pr ic e
o f
th e
w e lfa r e
o f
th e
d evic es
o f
I n d e x ,"
La b o r
S t a t i s t i c s .,
19 70 *
57
s e r vic e s
when
and
purc hased
o t h e r s " .
w ou ld
To
a
t a x ,
th e
in
e f f e c t
o f
ta x e s .
Th e
no
do
CPI
w here
can
haps
be
w ere
changed
in
can
t h i s
e n viro n m e n t
m ore
o f
th e
in d e x
to
a c tio n s .
one
r e s u l t
c u r r e n tly
p a s t
s h o u ld
in
a
be
m ade
o f f s e t .
m any
i f
o n ly
o f
m ore
assu red
in
a d ju s tm e n t
b e in g
be
th e
in c lu d e d
Pr ic e
is
in
to
e ve n ts
e x te n t
w ay
t h a t
t h a t
To
do
persons
t h a t
rem oved
who
fro m
argu e
no
c o n c e p t
o f
th e
(W P I),
w h ic h
is
p r ic e
in d e x
because
expand
th e
c o n c e p t
ta k e
p lac e
a d ju stm e n t
was
n o t
be
take n
change
th e
o f
ta k in g
th e
a d ju s tm e n t
p e r
cars
(a n
i f
th e
e xis te n c e
o f
econom ic
a d ju stm e n t
an
g a s o lin e
n a tu re
an
th e
o u ts id e
harm ed
lead ed
o f
o f
o f
o f
n e t
when
s h o u ld
s p e c i fi c a ti o n s
because
a g a in s t
take n
ta k e n ,
m easurem ent
o p p o s ite
b u t
w as
t h a t
i t
ig n o re d
p r ic e
sh o u ld
w ou ld
though
p r i c e ,
a
in tr o d u c tio n
m e rely
t h i s
in
e n viro n m e n t
Th e y
d e te r io r a te d
t h a t
in
In d e x
r e je c te d
to
c a te g o r y ).
th e
t h a t
as
in c re a s e
th e
because
a c c e p t
purc hase
l i t e r a l l y ,
are
m easure
Th o s e
in d i v i d u a l s
d e vic e
W h ole sale
to
c a r s .
th e
assum ed
q u a l i t y -d e t e r i o r a t i o n
take n
argum ent
was
A
o f
to
v o l u n t a r i l y ,
d e t e r i o r a t e d ,
p r ic e
m a rk e t.
be
them
e q u a Va m d -g p p o s ite
th e
an
i t
ta xe s
th e
a r g u m e n t ,i t
econom ic
u t i l i t y
s o .
w ou ld
in
h ave
c o n s id e r a tio n
c o s t
e n viro n m e n t
o f
t h a t
pu rc h ased
th e
in
" i n
s h o r t ,
w ou ld
t r e a t
w ere
•
In
h ave
o th e rs
•
p ro d u c ts
the
t r a n s
a d ju stm e n t
w as
b u t
take n
p le a d
in
th e
f o r
•
I t i s t r ue t hat t he CPI
and WPI
have not meas ur ed " soci al
choi ce of goods" when t hey ar e pur c hased i n t he f or m of
t axes.
( The i ncr eased t ax on goods l evi ed t o i mpr ove school s
i s t r eat ed as a pr i ce i ncr ease i n i ndexes,
such as t he CPI ,
whi ch i ncl udes sal es t axes i n t he pr i c e—wi t h no qual i t y
adj ust ment
however ,
f or sc hool s* The ant i - s mog devi ce i s di f f er ent ,
i n t hat i t i s at t ached t o and i s par t of
t he good
pur c has ed) .
§
Pr oduct i on of t he devi ces r epr esent s a genui ne i ncr ease
i n ec onomi c out put .
They ar e made, bought , and sol d i n t he
econonr y and cont r i but e t o val ue added.
To t he ex t ent
r e
sour ces ar e used i n t hei r pr oduc t i on and assumi ng t hey ar e
ef f ect i ve,
•
t he adj ust ment shoul d be made.
Fai l ur e t o adj ust woul d r esul t
i n no meas ur ed pr oduct i on
i ncr ease i n def l at ed val ue measur es.
duct i vi t y decr ease br ought
Ther e woul d be a pr o
about by t hei r pr oduct i on,
i n
asmuch as man- hour s ar e ex panded i n t hei r manuf act ur e.
As i n mos t
cases wher e t her e ar e di ver gent
choi ce depends on t he goal .
vi ews,
t he
The i nt r oduct i on of t he devi ce i s
t r eat ed as a qual i t y change i n gover nment
pr i ce i ndexes.
Thi s i s t he r esul t of a deci si on cons i s t ent wi t h t he . t ypes
of i ndexes whi c h ar e l ar gel y pr oduc t i on- or i ent ed,
used i n nat i onal
•
To t r eat
and
account s def l at i on.
t he addi t i on of t he devi ce as a pr i ce i ncr ease
woul d make t he pr i ce i ndex st r uct ur e qui t e r andom.
I f t he
59
gover nment r equi r ed t he car owner t o i nst al l
car
a devi ce on hi s
( r at her t han r equi r e t he manuf act ur er t o i nst al l
t hat devi ces wer e sol d separ at el y,
i t),
so
t her e coul d be no pr i ce
i ncr ease.
For di f f er ent
•
t ypes of i ndexes one mi ght make t he f ol l owi ng deci si ons:
For def l at i on of GNP ( whi ch deal s wi t h a money economy)
t he adj ust ment
•
( i . e. ,
no pr i ce r i se) .
For def l at i on of a new GNP conc ept measur i ng al l
act i vi t y,
t ake
whet her i n or out of t he money economy,
pr oduct i ve
t ake t he
adj ust ment but al so t ake some ear l i er pr i ce i ncr ease,
whi ch
occur r ed when t he envi r onment det er i or at ed.
•
For cost - of - l i vi ng i ndexes based on t he money ec onomy t ake
t he pr i ce i ncr ease and r ej ect
t he adj ust ment .
• For cost - of - l i vi ng i ndexes based on monet ar y and non- monet ar y
val ues t ake t he adj ust ment .
•
For i nput
i ndexes,
wher e t he buyer has no need of
t he devi ce
and t he i ndex i s used l ar gel y f or set t i ng r at es of c ompens a
t i on,
t ake t he pr i ce i ncr ease ( e. g. ,
ant i - smog devi ces on
t axi cabs and buses) .
( 2)
Low- Sul phur Fuel
Oi l
Exampl e
A quest i on ar ose whet her t o adj ust t he heat i ng
f uel
pr i ce downwar d t o account
t hat
l ow- sul phur f uel
at mospher e.
ur e of
f or t he r equi r ement
( New Yor k Ci t y)
be used i n or der t o i mpr ove t he qual i t y of t he
The pr i ce i ndex i n quest i on i s a speci al - pur pose meas
" changes i n pr i ces of goods and ser vi ces bought by oper at or s
60
of uncont r ol l ed apar t ment
or l evel
houses i n New Yor k Ci t y at t he st andar d,
of oper at i ons t hat exi st ed i n 1969 . " — ''
l ow- sul phur f uel
was admi t t edl y an i mpr ovement
of t he at mospher e was concer ned.
t r eat
i n so f ar as pol l ut i on
The quest i on i nvol ved whet her t o
t he r epor t ed pr i ce r i se as ext r a payment
f uel
The change t o
or as a genui ne pr i ce i ncr ease.
f or bet t er qual i t y
The deci si on was t hat t he pr i ce
i ndex be desi gned t o cover t he cost s t o l andl or ds of mai nt ai ni ng a
f i xed l evel
benef i t
of ser vi ce ( housi ng) .
Because t he i mpr oved f uel
t he l andl or d- pur chaser nor pr ovi de bet t er housi ng,
was t r eat ed as a pr i ce i ncr ease.
di d not
t he change
Thi s al l owed t he pr i ce i ncr ease t o
be pass ed on t o t he t enant as a cost .
On t he ot her hand,
ot her ki nds of f or ced subst i t ut i ons woul d
have been t r eat ed as qual i t y changes.
For exampl e,
had a l andl or d
been f or c ed t o pur chase bet t er r ef r i ger at or s f or t he apar t ment s,
t he
deci si on woul d have been t hat t hi s i ncr eased t he r ent al
val ue t o t he
t enant and r esul t ed i n an i mpr ov ement
no pr i ce i n
i n ser vi ce.
Thus,
cr ease woul d have been t aken.
I n summar y,
f uel
oi l
bot h t he ant i - smog deci si on and t he l ow- sul phur
deci si on,
t hough opposi t e, wer e not i ncons i s t ent because
each was made ac cor di ng t o t he pur pose of t he par t i c ul ar pr i ce
i ndex.
13/ See " Repor t on t he 1971 Pr i c e I ndex of Oper at i ng Cost s f or Unc on
t r ol l ed Apar t ment Houses i n New Yor k Ci t y" 1972, Repor t No. 23,
Mi ddl e At l ant i c Regi onal Of f i ce, Bur eau of Labor St at i st i cs.
61
6.
Rel evance t o Mi l i t ar y Pr i ci ng
The t wo exampl es ci t ed do not appl y spec i f i c al l y t o i t ems
of pr i mar y i nt er est
t i ons,
however ,
The r eader wi l l
i n a mi l i t ar y pr i ce i ndex. — '■
Ther e ar e si t ua
wher e t he concept s i l l ust r at ed do have appl i cabi l i t y.
r ecal l
t hat one of t he pur poses of an i nput
pr i ce
i ndex was t o pr ovi de an est i mat e of pr i ce of goods and ser vi ces pur
chased,
adj ust ed t o ac count f or t he per f or manc e of t he i t ems pur chased
( i ndex choi ce No.
2) .
Under t hi s conc ept a deci si on coul d be r eached
t hat qual i t y adj ust ment s wi l l
be made onl y when t he change cont r i but es
t o ( or di mi ni shes)
t he abi l i t y of t he mi l i t ar y es t abl i s hment
t ake i t s mi ssi on.
I n t hi s case bot h t he ant i - s mog devi ce and t he l ow-
sul phur f uel
woul d be t aken as pr i ce i ncr eases.
pur chase of cr ude oi l
Si mi l ar l y,
t o under
changi ng t he
at a hi gher pr i ce f r om one count r y t o anot her ,
mot i vat ed by a need t o pr ovi de pol i t i cal
woul d be t r eat ed as a pr i ce i ncr ease.
if
suppor t t o t he f or mer count r y,
Ot her r equi r ement s t hat woul d
be t r eat ed as pr i ce i ncr eases woul d be hi gher - t han- pr evai l i ng wage
r equi r ement s or payment s above t he mar k et
ness ( e. g. ,
smal l
pr oducer ) .
On t he ot her hand,
st r i ct spec i f i c at i on changes as cr i t er i a,
ment s f or t he smog devi ce and f uel
t he cr ude oi l
pr i ce t o ai d a t ype of bus i
oi l
i nput i ndexes,
woul d al l ow qual i t y adj us t
cases;
but t hey woul d ac cept
r i se as a pr i ce r i se because t her e was no physi cal
i f i cat i on change.
The l at t er mi ght
under some wel f ar e or nat i onal
usi ng
s pec
be accept ed as a qual i t y change
secur i t y ( br oadl y def i ned)
cr i t er i on.
14 / To t he ext ent t hat mi l i t ar y vehi cl es ar e r equi r ed t o u s e ant i smog devi ces,
t he exampl e woul d have di r ect appl i cat i on.
62
7.
Gener al
Wel f ar e and Pr i ce I ndexes
Rober t A.
Pol i ak has set
t r eat ment of t he envi r onment
f or t h t he vi ew t hat
i n a cost - of - l i vi ng i ndex i s cl ear .
Var i ous measur es of t he qual i t y of
t he envi r onment ent er t he ut i l i t y
f unct i on of t he r epr esent at i ve househol d,
envi r onment decl i nes,
" The pr oper
and,
as t he qual i t y of
t he
t he hous ehol d can r emai n on a par t i c ul ar i n
di f f er ence cur ve onl y by i ncr easi ng i t s consumpt i on of goods and s er
vi ces.
Thus,
i f t he pr i ces of goods r emai n unchanged and t he qual i t y
of t he envi r onment det er i or at es t hen t he cost - of - l i vi ng wi l l
That i s,
t o keep t he hous ehol d at a const ant
l evel
i ncr ease.
of sat i sf act i on,
i t woul d be necess ar y^ t o compensat e i t f or t he decl i ne i n t he qual i t y
of t he envi r onment " .
Whi l e agr eei ng wi t h t he at t r act i veness of t hi s concept Deni son
poi nt s out
i n t ur n,
t hat we woul d r equi r e a measur e of soci et y' s needs.
cal l s f or meas ur ement of t he human envi r onment i n whi ch we
l i ve- - ec onomi c and soci al .
peopl e ar ound us.
Ca n
we
a tte n d
a
d is c r im in a te d
" p u r i t y
Thi s,
o f
enor mous l y af f ect ed by t he
Can we go wher e we l i ke wi t hout
le c tu r e
a g a in s t?
a i r
" We ar e al l
and
w ith o u t
Are
w a te r ,
o u r
i t
b e in g
n e ig h b o rs
a c c e s s i b i l i t y
f ear of at t ack?
d is ru p te d ?
c o n g e n ia l? "
o f
p ark
W ill
we
He
a ls o
la n d s ,
be
l i s t s
presence
o f
16/
r ash and r at s. "
J5 /
P o l i a k ,
Ro b e rt
Pe n n s y lva n ia ,
16 /
De n is o n ,
o f
He concl udes t hat such a meas ur e i s i mpr act i cal
A .,
Ed w a r d
Cu r r e n t
" So m e
u n p u b lis h e d
F .,
B u s in e s s .
Pr o b l e m s
in
th e
C P I ,"
U n i v e r s i t y
n o te .
"W e lfa re
Ja n u a r y
Measurem ent
19 71.
o f
y
and
th e
G N P ,"
Su rve y
—
- - 7
63
The aut hor s of t hi s r epor t agr ee t hat adj ust ment
t al
changes,
f or env i r onmen
unr el at ed t o changes i n t he at t r i but es of goods and
ser vi ces bought and sol d,
i s not f easi bl e i n t oday' s wor l d and woul d
l ead pr i ce i ndex f or mul at or s i nt o a t hi cket of opposi ng vi ews.
In
addi t i on t o Deni son' s l i st one coul d add consi der at i ons of how t o
handl e ext r a pai nt i ng and l aunder i ng,
as ai r pol l ut ant s i ncr ease,
l i vest ock damage f r om at omi c f al l out ,
i ncr ease of st r i p mi ni ng,
cr ease si nce 1939 i n gover nment
i nvest i gat i v e pr ogr ams, and a host
of ot her changes i n t he economi c,
One change t hat wi l l
pol i t i cal ,
and soci al
at mospher e.
r ecei ve mor e at t ent i on i s t he ef f ect
of t he i ncept i on of t he vol unt eer ar my.
t o nat i onal
i n
As sess ment wi t h r espect
secur i t y of changes i n mor al e of per sonnel ,
among ci t i zens r egar di ng gr eat er f r eedom f r om t he dr af t
f eel i ngs
( or i s
t hi s of f set by t he ear l i er i ncept i on of peacet i me dr af t pr i ce
as appl i ed t o Wor l d War I I ?) wi l l
bet t er t o deal
be r equi r ed.
I t woul d seem
onl y wi t h changes i n ef f ect i v enes s i n r el at i on
t o abi l i t y t o do a spec i f i c t ask,
r at her t han t o t r y t o adopt
wel f ar e concept s.
8.
I nci dence of Qual i t y Change
Af t er deci si on has been r eached on whet her a par t i c ul ar
change cal l s f or an adj ust ment
r i or at i on,
f or qual i t y i mpr ovement or d e t e
t he quest i on r emai ns, what pr oduc t or pr oduct s i n t he
chai n of pr oduc t i on shoul d be adj ust ed? I t i s f ai r l y obvi ous t hat
change i n a pr oduct ' s qual i t y i n a gi ven i ndust r y usual l y does
af f ect
t he per f or manc e and qual i t y of goods and ser vi ces pr oduced
by ot her i ndust r i es.
For exampl e,
an i mpr ov ement t hat woul d cal l
64
f or a qual i t y adj ust ment f or pai nt mi ght
ment
al so r equi r e a qual i t y adj us t
f or pr oduct s of pai nt - us i ng i ndust r i es,
f ewer coat s or wer e mor e dur abl e.
t he qual i t y adj ust ment
i f t he new pai nt al l owed
How f ar t o car r y f or war d— or back war d—
i s a pr obl em f or t he st at i st i ci an,
mi nd t he pur pose of t he i ndex es . - ^
keepi ng i n
The t ype of adj ust ment
t hat shoul d
be made depends on t he pur pose:
•
Wher e t he goal
i s meas ur ement of ut i l i t y,
ment shoul d be made,
t he ent i r e adj us t
t he pur chaser ac qui r i ng t he ent i r e ext r a
ut i l i t y.
•
Wher e t he goal
i s t o assess ut i l i zat i on of r esour ces,
cost or r esour ce use adj ust ment
i s per t i nent ,
t he
and t he sel l er
and pur chaser bot h shar e some of t he cont r i but i on.
Thi s i s
t he met hod r ecommended i n t hi s r epor t as t he basi c i ndex.
•
I f an i mpr ovement
i n per f or manc e i s accompl i shed at
c os t , t he adj ust ment
l ower
shoul d be made under t he ut i l i t y concept
but not under t he r esour ce use concept .
9.
Some Met hodol ogy on Qual i t y Adj ust ment s
At
t hi s poi nt
i t woul d be wor t hwhi l e t o cons i der some met hods
by whi c h qual i t y change adj ust ment s have been made i n pr i ce i ndexes
( see Exhi bi t
111- 2) .
I n gener al ,
t he met hodol ogy i s mat hemat i c al l y
si mpl er t han t he economi c and t echnol ogi cal
ar r i ve at a j udgment cons i s t ent wi t h:
anal ysi s necessar y t o
( 1) past t r eat ment of si mi l ar
17/ A number of assumpt i ons concer ni ng cost and qual i t y change, as t hey
af f ect t he home i ndust r y and r ecei vi ng i ndust r i es, ar e exami ned i n:
Sear l e, Al l an D. , " Some Thought s Conc er ni ng Al l ocat i on of Qual i t y
Adj ust ment s. "
An unpubl i shed memor andum, BLS, Januar y 1969.
65
speci f i c at i on changes,
( 3)
t he over - al l
( 2) deci si ons made f or si mi l ar pr oduct s,
goal .
Once t he deci si on t o adj ust
a.
and
i s made,
sever al
met hods ar e avai l abl e
Si mpl e Li nk i ng or Spl i ci ng
Wher e i t i s ei t her assumed or es t abl i s hed on t he basi s
of sound i nf or mat i on t hat t he ent i r e quot ed pr i ce i ncr ease or decr ease
i s due t o qual i t y change,
t he i ndex f or t he i t em i s hel d at t he l evel
at t ai ned pr i or t o t he new speci f i cat i on.
new i t em change t he i ndex,
ar e var i at i ons,
but t he i ni t i al
accor di ng t o ci r cumst ance.
Fut ur e pr i ce changes i n t he
change does not .
Thus,
Ther e
i f onl y par t of t he
quot ed pr i ce change i s deemed due t o qual i t y change, onl y. t he r emai ni nq
18/
par t i s al l owed t o af f ect t he i ndex.
Thi s met hod i s gener al l y
used wher e mor e pr eci se dat a ar e l acki ng or wher e s el l er can or wi l l
gi ve onl y est i mat es as t o t he val ue of added or del et ed f eat ur es,
b.
Spec i f i c Cost of Per f or mance Adj ust ment
For compl ex i t ems i t may be possi bl e t o obt ai n cost
dat a f r om cost account i ng and engi neer i ng r ecor ds.
a compl ex pi ece of equi pment ,
Wher e t he i t em i s
an anal ysi s of each new or ol d f eat ur e
i s r equi r ed t o det er mi ne whet her i t i s ac cept abl e as a qual i t y change
18/ t her e ar e t wo ways t hi s can be accompl i shed: ( 1) l i nki ng t o an
adj ust ed " back pr i ce" or ( 2) l i nki ng t o an adj ust ed cur r ent pr i ce:
5. 00
( 1) Pr i ce
5. 00
( 5. 40)
5. 60
5. 88
5. 88
108. 9
108. 9
i ndex
100. 0
100. 0
103. 7
5. 00
5. 00
( 5. 20)
( 2) Pr i ce
5. 60
5. 88
5. 88
100. 0
109. 2
109. 2
100. 0
104. 0
i ndex
( Of t he 60<t quot ed i ncr ease, 20 <t i s pr i ce i ncr ease and 40£ due
t o qual i t y change) . The second assumes a pr i ce change i n t he qual i t y
f eat ur e; t he f i r st does not .
66
under t he i ndex conc ept i n use.
up t o t he l evel
I f i t i s,
of pr i ci ng ( f . o. b. ,
must be det er mi ned.
Fi nal l y,
a net
f or use as t he adj ust ed val ue must
cost of pr oduct i on,
f act or y,
del i ver ed,
f i gur e of al l
be pr epar ed.
mar k ed
f . a. s. ,
et c. )
chanaes comput ed
19/
Fr om t hi s poi nt
on t he met hod i s t he same as i n " a" above.
c.
Adj ust ment
f or Per f or manc e
For t he cons umer - or i ent ed appr oach t he act ual
i n per f or mance,
physi cal
f uel
at t r i but e,
i s a si mpl e mat t er ,
d.
use,
hor sepower ,
l engt h- of - 1i f e or some ot her
must be ascer t ai ned and measur ed.
Somet i mes t hi s
usual l y a wei ght i ng f act or may be r equi r ed.
Regr essi on Anal ysi s
Thi s met hod consi st s of an at t empt ,
t i st i cal
change
r egr essi on t echni ques,
by means of s t a
t o decompose pr i ce i nt o sever al
c om
ponent s — a basi c pr i ce and pr i ce of one or mor e at t r i but es t o whi ch
qual i t y has been assi gned.
One of
Cour t
t he ear l i est at t empt s t o appl y t hi s
met hod was set
f or t h by A. T.
i n 1939,
dr awi ng on aut omobi l es
as an exampl e.
Ri char d St one i ncl uded a t r eat ment i n hi s pamphl et
20/
on pr i ce i ndexes and nat i onal
19/
account s.
I t i s not t he pur pose
Per haps t he most consi s t ent use of t hi s met hod i n det ai l can be
f ound i n t he passenger car and t r uck component of t he Bur eau of
Labor St at i st i cs Whol es al e Pr i ce I ndex.
A copy of t he gui del i nes
used f or t hi s adj ust ment i s at t ached as wel l as a copy of t he
gui del i nes f or t r act or s and ot her f ar m machi ner y and equi pment
( Appendi ces I I I - A and B) .
20/ See:
" Hedoni c Pr i ce I ndexes wi t h Aut omot i ve Exampl es" i n Cour t ,
A. T. , The Dynami cs of Aut omobi l e Demand, Gener al Mot or s Cor por at i on,
1939; and St one, Ri char d, " Quant i t y and Pr i ce I ndexes i n Nat i onal
Account s, " Or gani zat i on of Eur opean Economi c Cooper at i on, 1956.
67
her e t o r evi ew t he wor k of t hese and ot her s as
much as t o gi ve
t he f l av or of t he appr oach.
21/
I n a r el at i vel y r ecent paper
Tr i pl et t has st at ed " Goods—
es peci al l y t he mor e compl ex ones- - may be di saggr egat ed i nt o
st i t uent char ac t er i st i cs,
goods,
and t he char act er i st i cs,
c on
r at her t han t he
ar e ent er ed i n t he i ndi vi dual ' s ut i l i t y f unct i on. " He t hus
deal t wi t h t he pr obl em pr i nci pal l y f r om t he cons umer vi ewpoi nt and
pr oc eeded t o descr i be how a r egr essi on equat i on can be set up t o
deal
wi t h cr oss sect i on pr i ce dat a f or t he di f f er ent l y pr i ced var i et i es
of a good i n any one y ear ( or adj acent year s) .
I t i s not ,
concept .
however ,
necessar y t o adopt
a cons umer - or i ent ed
The r egr essi on t echni que i s es sent i al l y a t ool ,
per s e , and i s adapt abl e t o t he pr oduc t i on appr oach.
not a concept
I t i s essent i al
t hat a number of var i et i es be on t he mar k et at about t he same t i me;
t he t echni que woul d not wor k,
wer e i nt er est ,
di sappear ed,
i f al l
char act er i st i cs,
i n whi c h t her e
t o be suppl ant ed by new char act er i st i cs.
Cr oss sect i on dat a f or adj acent year s have been used t o es t i mat e
qual i t y c hange, as di st i nct
f r om absol ut e di f f er ent i al s of qual i t y
component s of pr i ce.
dat a f or t wo or mor e year s ar e combi ned
Of t en,
i n t he same r egr essi on equat i on wi t h a t i me var i abl e.
cor r ect l y war ns t hat ,
" i n some quar t er s,
t he essent i al
Tr i pl et t
par t of
t he
Hedoni c t echni que has er r oneousl y been i dent i f i ed as t he est i mat i on
of t he qual i t y- adj ust ed pr i ce i ndex di r ect l y f r om t he r egr essi on.
21/
Tr i pl et t , Jack E. , " The Theor y of Hedoni c Qual i t y Meas ur ement and
I t s Use i n Pr i ce I ndexes, " BLS St af f Paper 6, Of f i ce of Pr i ces and
Li vi ng Condi t i ons, Bur eau of Labor St at i st i cs; 1971.
68
Thi s i s a mi sconcept i on.
The essence of t he Hedoni c t echni que i s t he
di saggr egat i on of pr oduct s i nt o char ac t er i st i cs and t he est i mat i on
of
i mpl i ci t
pr i ces f or uni t s of t he char act er i st i cs.
The i mpl i ci t
pr i ces of t he char ac t er i st i cs ar e t hen av ai l abl e f or adj ust i ng t he
obser ved mar ket
pr i ces f or di f f er ent pr oduct var i et i es f or t he
val ue of qual i t y di f f er ences. "
Thi s poi nt
i s i mpor t ant because i t
st r esses t he cont i nued use of t he commodi t y sampl e f or meas ur ement
of basi c pr i ce change and t he Hedoni c meas ur e f or t he adj ust ment .
I nst ead of adj ust i ng t he pr i ces,
an al t er nat e met hod i nvol ves
t he cons t r uct i on of a qual i t y- change i ndex , comput ed f r om t he es t i
mat ed pr edi ct ed pr i ces ( f r om t he r egr essi on equat i ons)
f or t he c om
bi nat i on of qual i t i es i n t he r ef er ence y ear and adj acent year s.
essence,
In
t he r esul t i ng qual i t y- change i ndex measur es t he change i n
pr i ce due onl y t o t he changi ng combi nat i on of qual i t y component s.
The qual i t y change i ndex i s t hen used t o def l at e t he unadj ust ed pr i ce
change as comput ed f r om t he col l ect ed dat a.
A det ai l ed devel opment of t he Hedoni c appr oach appear s i n a
22/
pr esent at i on by Zvi
Gr i l i ches.
He dr aws on aut omobi l e pr i ces f or
hi s exampl e and adj ust s f or ni ne char act er i st i cs.
meas ur es ( hor sepower , wei ght
22/
and l engt h)
Thr ee ar e expl i c i t
and si x ar e dummy var i abl es
Gr i l i ches, Zvi , " Hedoni c Pr i ce I ndexes f or Aut omobi l es: An Ec onome
t r i c Anal ysi s of Qual i t y Change, " St af f Paper No. 3, The Pr i ce
St at i st i cs of t he Feder al Gov er nment , a r epor t of t he Pr i ce St at i st i es Revi ew Commi t t ee of t he Nat i onal Bur eau of Economi c
Resear ch t o t he Bur eau of t he Budget , Hear i ngs bef or e t he Sub
commi t t ee on Economi c St at i st i cs of Joi nt Ec onomi c Commi t t ee,
Januar y 24, 1961.
69
( wi t h or wi t hout V- 8 engi ne,
st eer i ng,
har dt ops,
aut omat i c t r ansmi ssi on,
power
power br akes and whet her or not t he aut omobi l e i s a " compact " ) .
The aut hor poi nt s out t hat wei ght ,
pr oxy f or si ze.
I f wei ght
t hough measur abl e,
ceases t o be a pr oxy,
i s r eal l y a
t he use of t hi s v a
r i abl e woul d cause pr obl ems.
I n t he r egr essi on appr oach t he cal cul at i ons shoul d be subj ec t ed
t o var i ous st at i st i cal
t est s:
cor r el at i on,
coef f i ci ent s and mul t i - coi l i near i t y.
st andar d er r or s of
I n addi t i on,
nonst at i st i cal
i nt er pr et at i ons and anal ysi s of a qual i t at i v e nat ur e ar e necessar y.
Gr i l i ches pr ovi des an exampl e.
" The basi c met hod may be ser i ousl y
compr omi sed i f t he r el at i onshi p bet ween any one of t he measur ed di
mensi ons and t he mor e basi c ' r eal '
per i od t o t he next .
For exampl e,
qual i t i es wer e t o change f r om one
suppose af t er a gi ven dat e al l
wer e made of an al umi num al l oy, whi c h hal ved t hei r wei ght ,
l ut e and r el at i ve pr i ces di d not change.
i n f act ,
of measur ement .
not hi ng may have happened except
I f we di d not
know what
but abs o
Thi s change i n wei ght woul d
i ncr ease t he appar ent pr i ce of wei ght and r educe i t s l evel
whi l e,
car s
per car ,
f or a change i n uni t s
had happened,
mi st aken t hi s wei ght change f or a qual i t y change. "
concer ned because anal yst s usual l y know enough about
we woul d have
He i s not gr eat l y
pr oduct s and
mar ket s t o al l ow f or t hi s poss i bi l i t y and because such changes ar e
usual l y not sudden.
Never t hel ess,
t hi s pi t f al l
a pr i ce i ndex f or compl ex mi l i t ar y goods,
must
be avoi ded.
i t i s essent i al
t hat
In
somewher e
70
i n t he pr ocess det ai l ed knowl edge of par t i cul ar goods and changes
i n speci f i cat i ons be av ai l abl e t o t he i ndex mak er s . - ^/
Use of t he r egr essi on met hod f or qual i t y adj ust ment
pr i ce i ndexes i s,
t hus f ar ,
r ar e.
a not abl e exampl e of t he use of
i n ongoi ng
The Bur eau of t he Census pr ovi des
t he met hod i n t he " Pr i ce I ndex on
New One- Fami l y Houses. " The es t i mat i ng met hod consi st ed of
t he sal es pr i ce of t he house bas ed on ei ght physi cal
wi t h a t ot al
of st or i es,
of 35 cat egor i es:
3 cat egor i es;
ai r - condi t i oni ng,
number of bat hr ooms,
2 cat egor i es;
t ype of f oundat i on,
Unf or t unat el y,
l i mi t ed i n pr act i ce.
char act er i st i cs
9 cat egor i es;
3 cat egor i es;
t ype of par ki ng f aci l i t y,
2 cat egor i es;
met r opol i t an l ocat i on,
addi t i onal
si ze ( f l oor ar ea) ,
r egr essi ng
geogr aphi c l ocat i on,
24/
2 cat egor i es.
number
cent r al
2 cat egor i es;
12 cat egor i es;
t he appl i cat i on of t he r egr essi on met hod has been
The met hod r equi r es much mor e dat a,
and t he
dat a mus t be of a ki nd r el evant t o t he qual i t y changes
under st udy.
For t hi s r eason,
Tr i pl et t ,
Gr i l i ches,
t he pr esent aut hor
and ot her s have cal l ed f or mor e r esear ch and coor di nat ed dat a- gat her i ng , r at her t han adopt i on of t he met hod on t he basi s of t he i nt er
es t i ng exper i ment al
i ndexes al r eady devel oped.
i ndex pr ogr am mi ght wel l
appr oach,
but
The mi l i t ar y pr i ce
devot e some r esour ces t o devel opment of t hi s
t hi s shoul d be done si mul t aneous l y wi t h t he r el at i vel y
23/ The use of a meas ur abl e char ac t er i st i c as pr oxy f or a gi ven qual i t y
i s al so a devi ce t hat may be used i n t he cost - adj us t ment met hod
descr i bed above.
The same caut i ons appl y, what ev er met hod i s used.
24/ See:
Musgr ave, John C. , " New Bur eau of t he Census Const r uct i on
Pr i ce I ndexes, " Pr oceedi ngs of t he Amer i c an St at i st i cal As s oci at i on, 1968, and " Pr i ce I ndexes of New One- Fami Ty " Houses Sol d, "
Cur r ent Cons t r uct i on Repor t s. Second Quar t er . 1973.
71
si mpl er appr oaches ,
out l i ned ear l i er ,
because of t he many dat a pr obl ems
t o be sol ved.
e.
Empi r i cal
Meas ur ement of Qual i t y Change
Over t he year s suggest i ons have been made t hat change
i n t he mor e subj ec t i ve aspect s of qual i t y be measur ed by di r ect
col l ect i on of
i nf or mat i on.
Hen' s and women' s cl ot hi ng st yl es mi ght
be j udged by a scal e of 10 per haps,
t o pr ovi de r at i ngs.
Most
and a sampl e of consumer s asked
at t empt s t o obt ai n mor e subj ec t i ve f act or s
have not pr ogr ess ed ver y f ar , but
t her e ar e some except i ons,
at l east
i n concept .
25/
A r ecent paper by Maynes
per i ment al
pr esent s t he r esul t s of some ex
wor k i n whi c h qual i t y of
f ur ni t ur e ( sof a beds)
on t he basi s of a scal e 0 t o 100 f or aest het i cs,
war r ant y,
knowl edge of pr oduct ,
i s made f or use of
r el i abi l i t y and war r ant y.
The sy st em appear s t o have par t i c ul ar appl i cat i on t o consumer
knowl edge on t he par t of
Maynes poi nt s out
not exper t s,
To t he ex t ent t hat c on
do t hi s t her e i s t he same pi t f al l
ear l i er under t he " mar ket
t he depen
t he as sess or i n assi gnment bot h
of wei ght s and scor es among char act er i st i cs.
sumer s,
A case
t hi s t ype adj ust ment , whet her or not quot ed pr i ces
goods i n t he cons umer - or i ent ed appr oach.
dence Li
dur abi l i t y,
saf et y and at t r i but es of sel l er s wi t h r egar d t o sensi t i vi t y,
conveni ence,
change.
comf or t ,
i s assessed
ment i oned
pl ace" met hod.
25/ Maynes, E. Scot t , " The Concept and Meas ur ement of Pr oduc t Qual i t y, "
Conf er ence on Resear ch i n I ncome and Weal t h, 1973.
72
f.
Changi ng t he Speci f i cat i ons
At t hi s poi nt t her e may be a t empt at i on t o sol ve t he
adj ust ment pr obl em by means of anot her l ook at t he speci f i cat i on.
On t he one hand,
t he adj ust ment can be avoi ded ( but not
t he pr obl em)
by wr i t i ng t he spec i f i c at i on of t he i t em so br oad t hat changes i n
qual i t y ar e hi dden.
On t he ot her hand,
t o dr awi ng speci f i cat i on
( especi al l y new model s)
an excess of zeal
coul d l ead
even f i ner so t hat succ es si ve qual i t y changes
ar e t r eat ed as i nt r oduct i on of new pr oduct s.
The f i r st sol ut i on t r eat s qual i t y changes as pr i ce changes;
second el i mi nat es al l
pr i ce changes t hat oc c ur at model
t he
c hange
ov er t i me ( a popul ar t i me f or pr i ce changes) . ( The r eader i s r ef er r ed
t o Sect i on B.
g.
on spec i f i c at i on and Exhi bi t
Exampl es of I nt er est
111- 2. )
i n Mi l i t ar y Pr i c i ng
For t hose i t ems pur c hased by DOD t hat have ci vi l i an
count er par t s,
t he so- c al l ed " shel f i t ems, "
t he ex per i ence of ot her
agenci es shoul d pr ove of di r ect assi st ance on t he pr obl em of qual i t y
26/
adj ust ment .
The ex per i enc e— and r ec or ds — of BLS' s Whol es al e Pr i ce
I ndex pr ogr am, es peci al l y shoul d be of assi st ance f or commodi t i es.
For ser vi ces,
ot her t han wages and sal ar i es,
pr ogr am shoul d pr ovi de hel p.
of mi l i t ar y equi pment ,
par t , but
26/
f u l ,
p r i c e
inasm uch
l i k e l y
o f
For t he non- homogeneous c ompl ex i t ems
t her e wi l l
usual l y be no di r ect ci vi l i an count er
i deas on possi bl e qual i t y adj ust ment s can be gl eaned f r om
a c tu a l
Th e
t he Cons umer Pr i ce I ndex
to
c on c e p t
be
as
d ata
o f
o t h e r
agen c ies
term s
o f
s a l e ,
d i f f e r e n t
in
th e
and
m e th o d o lo g y,
are
m a r k e ts ,
c i v i l i a n
h o w e ve r,
u n l i k e l y
d i s c o u n t s ,
econom y.
sh o u ld
be
to
be
e t c .,
h e l p
are
Co n s id e r a tio n s
s i m i l a r .
EXHI BI T I I 1- 2— QUALI TY AND QUANTI TY CHANGE
Under l yi ng Assumpt i ons and Met hods, Accor di ng t o Concept
•v
Assumpt i ons Under l yi ng Def l at ed Out put and Pr i ce I ndexes
Adj ust ed f or Qual i t y Change
Concept of Pr i ce I ndex and
Li kel i hood of Use:
Pr oduct i on Consumpt i on Wel f ar e
Or i ent ed
Or i ent ed
Or i ent ed
Met hod of Ad. i ust i nq f or Qual i t y
Change
Li nki ng t o si mi l ar pr oduct
X
X
X
Pr i ce change r epr esent s quant i t y and qual i t y change— compet i t i ve mar ket .
Cost of f act or s of pr oduct i on
X
-
-
Cost change ( i ncl udi ng pr of i t ) pr opor t i onal
Per f or mance
-
X
-
Physi cal
Regr essi on
X
X
X
Aver ages qual i t y change f or a var i et y of speci f i cat i ons:
-
X
X
Subj ect i ve r anki ng of char act er i st i cs r epr esent s quant i t y and qual i t y change.
X
X
X
Pr i ce change r epr esent s quant i t y and qual i t y c hange—compet i t i ve mar ket .
Empi r i cal :
subj ect i ve
Tr eat as new pr oduct
per f or mance change por por t i onal
t o quant i t y and qual i t y change.
t o quant i t y and qual i t y change.
any chosen assumpt i on.
I ndex Concept Li kel y t o Accept
Adj ust ment f or Qual i t y
Chanqe I n:
Saf et y
Yes
Yes
Yes
Comf or t
No! /
Yes
Yes
Per f or mance
Yes
Yes
Yes
Fuel
Yes
Yes
Yes
Envi r onment
Nol /
Nol /
Yes
Wel f ar e
Nûr /
No1/
For ced subst i t ut i on
Yes
Nol /
use
FOOTNOTES:
y
Adj ust ment mi ght be made i f accompani ed by cl ear l y
i dent i f i abl e cost change.
2/ Unl ess of di r ect benef i t t o pur chaser .
3/ Unl ess of di r ect benef i t t o pur chaser and accompani ed
by cost change.
See t ext di scussi on of ant i - smog
devi ces and l ow sul phur f uel oi l .
Yes
*^i
oo
74
t he WPI
pr ogr am and f r om speci al
t o t i me.
pr i ci ng pr oj ect s under t aken f r om
t i me
Possi bi l i t i es concer ni ng qual i t y change f or mi l i t ar y per sonnel
wi l l
have t o be assessed on t hei r own mer i t s;
some al t er nat i ves t hat
wi l l
be f aced have r ecei ved cons i der at i on i n speci al
BLS pr ogr ams,
how
ever .
The f ol l owi ng not es on sel ect ed pr oduct s ar e i ncl uded i n an ef f or t
t o pr ovi de some l eads.
a concept ual
poi nt ,
The pr oduct s wer e chosen because t hey i l l ust r at e
or met hod,
r at her t han because t hey wi l l
sol ve a
speci f i c pr obl em f or a mi l i t ar y pur chase.
( 1) Aut omobi l es and Tr ucks
Det ai l ed descr i pt i ons of cr i t er i a as wel l
ni ous f i l e memor anda t r ace t he
as vol um-
- si si ons and r easons f or adj ust ment s
f or qual i t y i n t he Whol es al e Pr i ce I ndex.
St udy of aut omobi l es and
t r ucks i s r ecommended f or met hodol ogy under t he r esour ce- use concept s.
I n addi t i on,
t he memor anda deal i ng wi t h var i ous si des of t he
quest i on of whet her t o adj ust
vi ces r eveal
f or t he i nst al l at i on of ant i - smog de
not onl y why t he devi ce was f i nal l y accept ed as a qual i t y
i mpr ov ement but
t he consi der at i on gi ven t o al t er nat i ves.
( 2)
Fuel
Oi l
The concept ual
quest i on has been di scussed i n connec
t i on wi t h t he i nt r oduct i on of l ow- sul phur f uel .
act ual i t y was mor e compl ex,
The quest i on f aced i n
f or not onl y di d t he l ow- sul phur f uel
t r i but e t o cl eaner ai r but t he BTU cont ent was changed so t hat ,
f ect ,
a compound adj ust ment
had t o be consi der ed.
t he change t o l ow- sul phur f uel
t he speci al
con
i n ef
As ex pl ai ned above,
was r ej ect ed as a qual i t y change f or
pur pose i ndex f or New Yor k apar t ment
house owner s.
It
is
75
l i kel y t hat i t woul d have been accept ed f or t he Whol es al e Pr i ce I ndex.
( 3)
Ti n Pl at e
A t hi nner el ec t r ol yt i c sheet
al l owed mor e beer
cans t o be made per t on ( but t he same number per sheet ) .
t r eat ed i n t he WPI
Thi s was
as a new pr oduc t — or an i mpl i c i t qual i t y i m
pr ovement .
( 4)
Room Ai r - condi t i oner s
Exper i ment al
wor k has been conduct ed
obj ect i ve of adj ust i ng f or changes i n BTU' s.
( 5)
Pi t f al l s ar e exami ned.
Gasol i ne
Exper i ment al
of adj ust ment s f or oc t ane r at i ng.
( 6)
wi t h t he
wor k has
been done on t he ef f ect
Pi t f al l s ar e exami ned.
Rent
Rent i n t he Cons umer Pr i ce I ndex was adj ust ed
f or t he year s 1940 t o 1950 t o account f or t he " new uni t bi as, " whi c h
ar ose dur i ng t he Wor l d War I I
The addi t i on of new r ent al
and Kor ean War per i ods of r ent cont r ol .
uni t s woul d nor mal l y be br ought i nt o t he
i ndex by t he l i nki ng pr oc es s — i . e. , no change i n t he i ndex woul d be
per mi t t ed sol el y f r om ent r y of a new r ent al
uni t .
gener al l y sat i sf ac t or y i n a cont r ol - f r ee mar ket .
of r ent cont r ol
t he mar k et
Thi s pr oc edur e i s
But dur i ng per i ods
f or ces t hat t end t o br i ng i nt o equi l i br i um
r ent s of ol der and newer uni t s do not f unct i on.
An adj ust ment was
t her ef or e made by compar i ng new and ol d uni t s wi t h t he same
76
char act er i st i cs and combi ni ng t he di f f er ent i al
27/
pr i at e wei ght s.
An ar gument can be made,
al so,
est i mat es wi t h appr o-
t hat a qual i t y adj us t
ment f or agi ng of uni t s shoul d al so be made— i . e. ,
i s i nf er i or t o a newer uni t ,
t hat an ol der uni t
cet er i s par i bus . A somewhat di f f er ent
but s i mi l ar pr oc edur e coul d be devel oped wi t h t hi s i n mi nd.
Ot her
suggest i ons i ncl ude t he i dea of adj ust i ng f or changi ng nei ghor hoods ,
conveni ence t o school s,
shoppi ng,
et c.
Thes e cost s mi ght be bet t er
sui t ed t o a cons umer - or i ent ed i ndex t han t o t he pr oduc er - or i ent ed
i ndex and woul d have l i t t l e bear i ng on a mi l i t ar y i nput pr i ce
ser i es.
( 7) Medi cal
Car e
I n t he Whol es al e and Cons umer Pr i ce I ndex pr ogr am
of BL S, t he pr i nci pl e of spec i f i c at i on pr i c i ng i s f ol l owed.
ot her vi ewpoi nt s,
of
however .
Fr om one poi nt of vi ew,
" mi r acl e dr ugs" so changed t he nat ur e of medi cal
concept
( i n t hi s vi ew)
car e t hat t he ent i r e
r oom,
medi ci ne,
physi ci an,
The ar gument hol ds t hat meas ur ement of pr i ce change i n hospi t al
r oom r at es,
f or exampl e,
f ai l s t o al l ow f or t he s hor t er dur at i on of
a st ay i n t he hos pi t al — e. g. ,
27/
t he i nt r oduct i on
shoul d be modi f i ed t o embr ace t he i dea of
payment f or a cur e r at her t han f or a hospi t al
et c.
Ther e ar e
qual i t y i mpr ov ement has not been t aken
For a det ai l ed desc r i pt i on see " I nt er i m Adj ust ment of t he
Cons umer Pr i ce I ndex, " June 1951, Bul l et i n 1039, pages 1- 10,
of Labor St at i st i cs, U. S. Depar t ment of Labor .
Bur eau
77
Nei t her do pr i ce i ndexes t ake i nt o account decl i ni ng
i nt o account .
qual i t y,
i ndi cat ed by t hose decr eases i n number of per sonnel
pat i ent not associ at ed wi t h pr oduc t i vi t y i ncr eases,
of house cal l s,
can cont r act
f or exampl e.
per
or decl i ni ng use
The c ount er - ar gument i s t hat pat i ent s
f or ser vi ces and commodi t i es onl y,
For cons t ant - dol l ar measur ement ,
not f or t he end r esul t .
t he sugges t ed pr i ce i ndex woul d
i ncr ease t he pr oduc t i on measur e t o i ncl ude i mpr ov ed pr ognosi s as a
quant i t y i ncr ement .
The ar gument s f or medi cal
car e par al l el ,
somewhat
f or adj ust i ng t he mi l i t ar y pr i ce i ndexes f or changes i n nat i onal
secur i t y obt ai ned f r om new equi pment or ser vi ces.
( 8)
Di r ect Labor
The ex per i ence of BLS i n pr i c i ng bot h Ar my ci vi l i an
and c ont r act or wages and sal ar i es f or mi l i t ar y Resear ch and Dev el op
ment
l abor at or i es has a di r ect bear i ng on t he mi l i t ar y pr i ce i ndex
29/
pr ogr am.
Becaus e of t he i mpor t ance of t he shi f t t o a vol unt eer
ar my,
t hi s subj ec t wi l l
i s suf f i c i ent
be di scussed agai n i n a l at er sect i on.
t o poi nt out
It
t hat t he Resear ch and Devel opment pr oj ec t
f ol l owed t he spec i f i c at i on or j ob sheet
r out e.
Admi ni st r at i ve i ncr eases
or i n- gr ade pr omot i ons wer e t r eat ed as pr i ce i ncr eases not qual i t y
changes ( pr i ce i ncr ease compensat ed by mor e ex per i enced per sonnel ) .
28/
Dur at i on of s t a y i n a hospi t al may or may not be a good pr oxy
f or qual i t y i mpr ov ement i n medi cal car e, of cour se. Al so, how
t o meas ur e f ai l ur es t o cur e woul d i nvol ve pr obl ems.
29/ See " Exper i ment al I nput Pr i ce I ndexes f or Resear ch and Devel opment , Fi scal Year s 1961- 65, " a r epor t by t he Bur eau of Labor
St at i st i cs t o t he Nat i onal Sci enc e Foundat i on, November 1968,
NSF 70- 7.
78
Ther e was some di scussi on of t r eat i ng t hese as qual i t y changes,
in
vi ew of t he changed pr ovi si ons f or gr ant i ng t hem under t he 1962 Feder al
Sal ar y Ref or m Act , whi ch el i mi nat ed t he aut omat i c f eat ur e and r equi r ed
an accept abl e l evel
of compet ence.
some hi ghl y ski l l ed pr of essi onal
However , when i t was f ound t hat
per sonnel
i ncr eases mor e t han one at a t i me,
wer e bei ng gi ven i n- gr ade
i n or der t o r et ai n t hei r ser vi ces^
t he qual i t y- change t heor y was abandoned.
Gr ade changes,
however wer e
t r eat ed as qual i t y or spec i f i c at i on changes and not al l owed t o af f ect
t he i ndex.
D-
Speci al
Meas ur ement Pr obl ems
1. New Pr oduct s
A pr i mar y ques t i on concer ni ng new pr oduct s i s whet her a s pe
ci f i c i t em i s r eal l y new or a var i et y of an ex i s t i ng pr oduct .
Thi s
was di sc us sed ear l i er i n t he cont ext of adj ust i ng f or qual i t y change.
A war ni ng was gi ven t hat
t he pr i ce spec i al i st shoul d r esi st t oo r eady
an assess ment t hat a new speci f i c at i on r epr esent s a new pr oduct .
Thi s
was because of t he possi bl e l oss of cont i nui t y and because pr i ce changes
coul d be hi dden.
Ther e ar e no unf ai l i ng si gns t o i dent i f y a new pr oduc t as s ome
t hi ng di f f er ent f r om t he ol d.
At some poi nt a t el evi si on set
is
r ecogni z ed as somet hi ng ot her t han a r adi o set wi t h pi ct ur e added,
but
f or l esser changes t he j udgment of t he anal yst pr evai l s,
t aki ng
i nt o account whet her a new use i s bei ng ser ved.
The t i mi ng of i nt r oduct i on of new pr oduct s i s al so i mpor t ant i n
an i ndex desi gned as a gener al
meas ur e of pr i ce change.
New pr oduct s
79
usual l y ar e i nt r oduc ed t o t he mar ket
r api dl y
at r el at i vel y hi gh pr i ces and
decl i ne i n pr i ce as vol ume gr ows.
i nt r oduce t he pr oduc t i nt o an i ndex,
unt i l
Ot her wi s e i t may become a downwar d bi as,
devel opment al
cost s.
I t i s i mpor t ant not t o
i t i s f ai r l y wel l
i f t he i ni t i al
est abl i shed.
pr i ce cont ai ns
I n a mi l i t ar y pr i ce i ndex f or compl ex goods t hi s
may not pose a pr obl em because of t he pr act i ce of
t r eat i ng r esear ch
and devel opment cost s separ at el y and pr i c i ng t hem separ at el y.
Wi nest one has sugges t ed t hat f or i t ems of mi l i t ar y har dwar e t he
downwar d
bi as caused by l i nki ng t he new i t em i nt o t he i ndex at a t i me
when i t i s decr easi ng r api dl y i n pr i ce,
i s at
( t houoh not necess ar i l y equal ) upwar d bi as,
'
make an adj ust ment f or qual i t y i mpr ovement .
2.
l east of f set by an opposi t e
st emmi ng f r om f ai l ur e t o
30/
Ti mi ng of Pr i c i ng
I t i s obvi ous t hat t he pr i c i ng of goods and ser vi ces i ncl uded
i n t he mi l i t ar y pr i ce i ndex shoul d coi nci de wi t h t he val ue t o be de
f l at ed t o obt ai n t he const ant dol l ar f i gur e.
cr uci al
i n si t uat i ons wher e t her e ar e:
or l ar ge changes i n i nvent or y or ( 2)
( 1)
The quest i on can be
l ar ge i nvent or y hol di ngs
t he pr oduc t i on cycl e i s ver y l ong
as i n shi pbui l di ng or const r uct i on.
Whet her t he mi l i t ar y pr i ce i ndexes wi l l
f ace t he pr obl em posed
by si gni f i c ant i nvent or i es or changes i n i nvent or y depends on t he
par t i c ul ar val ue dat a chosen f or def l at i on.
Speci f i cal l y,
r evol vi ng f und val ues i n t he numer at or woul d r equi r e t hat
use of t he
t he i nvent or y
30/ Wi nest one, Rober t L. and Ber nar d S. Bec k l er " Mi l i t ar y Pr i ce I ndex:
Pr el i mi nar y Pr es ent at i on, " Resear ch Anal ysi s Cor por at i on, Januar y
1968, Techni cal Paper RAC- TP- 289.
80
pr obl em be sol ved.
cr i bed,
The r evol v i ng f und,
i s of an i nt er nal
cons i s t i ng of i ndust r i al
st ocks
( wi t hi n DOD)
as i t has been gener al l y des
cost i ng,
f unds ( ar senal ,
or char gi ng,
syst em,
shi pyar d heav y r epai r s and
of l ar ge vol ume consumabl es) .
Mi l i t ar y pr ogr ams ei t her pur chase out si de DOD or " buy" f r om
t he r evol vi ng f und.
The di f f i c ul t y ar i ses when equi pment r ecei ved by
a pr ogr am i s pur c hased f r om t he pr i vat e ec onony one or mor e f i scal
year s ear l i er and per haps at a pr i ce di f f er ent f r om t hat char ged by
t he r evol vi ng f und.
Use of t he r evol vi ng f und dat a r ai se sever al
quest i ons:
•
Shoul d t he pr i ce used be t hat char ged by t he f und or t he
i ni t i al
•
pr i ce of t he i t em when pur c hased on t he mar ket ?
Shoul d bot h pr i ces be used and t wo t r ansact i ons set u p one t he i ni t i al
pur chase by t he Gover nment and t he ot her ,
t he " r esal e" wi t hi n DOD?
•
Does t he above i nvol ve doubl e count i ng quant i t i es of i nput ,
or can a " val ue- added" sy st em be set up t o meas ur e onl y
t he net ef f ect of i nt er nal
t r ansact i ons ?
f P. r . ap i nput pr i ce i ndex i t woul d be bet t er t o pr i ce i t ems as
t hey ar e bought by t he Gover nment and t o use t he r esul t i ng i ndex t o
-def l at e f unds of t he same t i me per i od as cl os el y as t hi s can be de
t er mi ned. Thi s deci si on woul d el i mi nat e t he use of t he r evol vi ng
f und r esal es,
and t he val ue of pr ogr ams pur c hased f r om t he f und woul d
have t o be i gnor ed.
Thi s pr ocedur e woul d have t he advant age of
81
def i ni ng t he i ndex i n t er ms of act ual
on t he basi s of i nt er nal
t r ansact i ons,
r at her t han par t l y
book keepi ng convent i ons.
The di sadvant age woul d be t hat pr ogr am act i vi t y dol l ar s woul d
be r educed by t he amount t hat was pur c hased f r om t he r evol vi ng f und,
i nasmuch as a compar abl e quant i t y had al r eady been used as a DOD
i nput i n a pr i or year .
I f t hi s wer e not sat i sf ac t or y ,
mi ght be wor k ed out , wher eby t he " r eal
some compr omi se
i nput " i nt o t he r evol v i ng f und
coul d be i dent i f i ed by pr ogr am af t er t he f act and r eassi gned t o t he
pr ogr am at i ni t i al
coul d have pr act i cal
r evol vi ng f und pr i ces and val ues.
Thi s sol ut i on
di f f i cul t i es st emmi ng f r om r epor t i ng pr obl ems.
What ev er t he det ai l s of
t he ul t i mat e sol ut i on i t i s r ecommended t hat
t he use of t he r evol vi ng f und dat a be mi ni mi z ed.
At t ent i on mus t al so be gi ven t o t he t i mi ng aspect s of pr i ci ng
goods wi t h l ong const r uc t i on or pr oduc t i on r equi r ement s.
For a mi l i
t ar y pr i ce i ndex t he shi pbui l di ng and mi l i t ar y cons t r uct i on pr ogr ams
come t o mi nd.
I n shi pbui l di ng t he pr obl em mi ght be posed di f f er ent l y
f or pr i vat e and f or gover nment yar ds.
For gover nment yar ds t he i t ems
pur chased woul d be mat er i al s and component s and cont r act wor k .
an out put
i ndex, shi pyar ds'
For
wage i ndex and a mi l i t ar y pr oduc t i vi t y
ser i es woul d al so be r equi r ed.
For pr i vat e yar ds t he uni t pur c hased
mi ght be t he compl et e shi p ( wi t h payment s made at spec i f i c poi nt s
of compl et i on) .
Becaus e r epor t s on st andar di z ed uni t s of shi p woul d
pr obabl y be unat t ai nabl e,
pr i ces,
r esor t mi ght be had t o s ubc ont r ac t or s' i nput
adj ust ed f or pr oduc t i vi t y change wi t hi n t he s hi pyar d ( see
82
sect i on on i ndex number f or mul ae) .
The t i mi ng of pr i c i ng i n ei t her
ev ent woul d have t o conf or m t o expendi t ur es i n or der t o der i ve a
31/
meani ngf ul def l at ed val ue ser i es.
The mat c hi ng of pr i ce and val ue can be even mor e compl i cat ed
i f t he addi t i onal
r equi r ement
i s i mposed:
t hat man- hour s,
empl oyment ,
and payr ol l s mus t be coor di nat ed f or t he pur pose of pr oduct i vi t y
measur ement .
To r et ur n t o t he shi pbui l di ng exampl e:
det er mi nes t i me of payment ;
t he l ong- t er m cont r act
and pr oduc t i on or pr ogr ess i s meas ur ed
i n t er ms of per c ent compl et i on, whi ch i s based on val ue put - i n- pl ace,
i ncl udi ng val ues of pur chased component s.
ex pended i n t he y ear ac cor di ng t o physi cal
not val ue.
Man- hour s,
however , ar e
pr oduct i on r equi r ement s —
The ent i r e pr ocess i s f ur t her conf ounded by var yi ng amount s
and t i mi ng of subcont r act i ng.
I n or der t hat t he pr ogr am of pr i ce
col l ec t i on and meas ur ement not be encumber ed wi t h r equi r ement s of
ot her measur es,
such as pr oduc t i vi t y ( except as nec es s ar y
to
es t i mat e out put pr i ce i ndexes f r om pr i ce i ndexes f or i nput s) ,
it is
sugges t ed t hat pr i ci ng be t i med t o coi nci de wi t h cont r act payment s
and val ues put - i n- pi ace.
31/ See Appendi x I I I - C, " Pr i ce and Cost i ndexes f or t he Shi pbui l di ng
I ndust r y,
f or some of t he consi der at i ons connec t ed wi t h c ons t r uc
t i ng a pr i ce i ndex f or shi ps.
83
Thi s may have t o b e compr omi sed t o some degr ee t o meet
of t he over al l
i ndex t o coi nci de wi t h quar t er l y or f i scal
t he needs
y ear r epor
t i ng r equi r ement s.
3.
Long- Ter m Cont r act s
To t he ex t ent t hat t he DOD ent er s i nt o l ong- t er m cont r act s
f or pur chase of f uel s or r aw mat er i al s,
cer t ai n speci al
pr i c i ng c on
si der at i ons mus t be t aken i nt o account .
Of t en cont r act s cal l
f or de
l i ver y ov er a cons i der abl e per i od of t i me wi t h pr i ce det er mi ned
at
t he i ni t i at i on of t he cont r act and wi t h pr ovi si on f or modi f y i ng t he
pr i ce per i odi c al l y by some i ndependent es cal at i ng ser i es.
not pose a par t i c ul ar pr i c i ng pr obl em,
di f f er ent pr i ces ar e avai l abl e.
i f cont r act s cal l
Thi s may
i f amount s pur c hased at t he
Ther e may be some est i mat i on r equi r ed,
f or t he pur c hase of
t he ent i r e out put of a mi ne,
manuf ac t ur i ng pl ant or f ar m wi t h quant i t i es onl y i ndef i ni t el y
speci f i ed.
4.
Speci al
Or der s
Some pr oduct s ( e. g. ,
speci al
or der .
cast i ngs,
pr i nt i ng i nk)
ar e made t o
I n t he case of bat ch pr oduc t i on of i nk,
f or exampl e,
i t mi ght be necess ar y t o pr i c e t he " r eci pe" and conf i ne t o t he f or mu
l at i on r equi r ed i t ems,
i ncl udi ng l abor .
For cast i ngs and ot her made-
t o- or der i t ems i t i s somet i mes possi bl e t o devel op a bl uepr i nt of a
pr ot ot ype and obt ai n si mul at ed bi d pr i ces ov er a per i od of t i me,
32/
r evi si ng t he bl uepr i nt ,
i f i t becomes t oo unr eal i st i c.
32/ The BLS has used t hi s met hod f or pr i ci ng of gr ey i r on cast i ngs,
t ur bi ne shaf t s and ot her heavy i t ems. See Appendi x I I I - D f or
ex ampl e.
84
5.
Tr anspor t
Char ges
A deci si on whet her t o i ncl ude t r anspor t at i on char ge i n t he
basi c pr i ce of goods pur c hased or t o set
up a separ at e i ndex f or t r ans
por t at i on i s a mat t er dependent par t l y on concept and par t l y on t he
33/
nat ur e of t he dat a.
I f t he val ue of goods t o be def l at ed i ncl udes
t r anspor t at i on char ges,
t hen t r anspor t at i on has t o be i ncl uded.
i s mor e s t r ai ght - f or war d f r om t he
i nput
It
pur chaser ' s vi ewpoi nt and f or an
i ndex t o i ncl ude t r anspor t at i on as par t of t he basi c pr i ce,
r at her t han t o set up a speci al
i ndex f or t he embodi ed t r anspor t at i on.
I t i s i mpor t ant t o not e t hat t he t wo met hods do not or di nar i l y pr oduce
t he same r esul t .
When t r anspor t at i on i s i ncl uded i n t he pr i ce,
t he
ser i es i mpl i ci t l y pr i ces t r anspor t at i on cost per uni t of pr oduct ; when
pr i ced separ at el y,
of a pr oduct
t r anspor t at i on i s pr i ced as t he char ge f or haul age
f or a gi ven di st ance or a f i xed number of t on- mi l es.
Thus,
var i at i on i n t he di st ance haul ed i s al l owed t o ef f ect
t he pr i ce i ndex
i n t he f or mer met hod,
( or l ess)
but i t i s t r eat ed as addi t i onal
quant i t y - - as mor e or l ess t r anspor t at i on— i n t he l at t er met hod.
Under one deci si on pr i ce may change;
t r anspor t at i on)
¿V
under t he ot her ,
34/
~
quant i t y ( or
changes.
I n t hi s sect i on r ef er ence i s made sol el y t o t he t r anspor t at i on
char ge bi l l ed wi t h or ot her wi se di r ect l y connect ed wi t h t he
pur chase of goods. Tr anspor t at i on s epar at el y pur chased, pass enger
t u - ' r ei 9” ^» w1 ^ » of cour se, r equi r e separ at e pr i ci ng.
34/ Thi s exampl e pr ovi des a speci al case of t he r econc i l i at i on of i nput - and- out put pr i ci ng. The t wo met hods can be equat ed, i f a c on
s i st ent pr oduc t i vi t y i ndex ( t on- mi l es per uni t of pr oduct ) i s
br ought i nt o t he cal cul at i ons.
85
Thi s quest i on has bear i ng on how t o t r eat
cr ude pet r ol eum,
when t he sour ce of suppl y changes wi t h no change i n
pr i ce at t he wel l
l i ver y.
pr i ces of such goods as
but at t he di f f er ent di st ances f r om poi nt of de
For t he pur pose of t he i nput
pr i ce i ndex i t woul d be mor e
i n keepi ng wi t h t he concept t o keep t he t r anspor t at i on char ge as par t
of t he pr i ce,
r at her t han t o set up a separ at e i ndex f or t r anspor t
and
mi ss t he ef f ect on pr i ce t hat woul d r esul t f r om swi t chi ng t o a cl oser
sour ce of suppl y.
6.
I nvent or y Change
The need t o adj ust
ar i ses i n at l east
The f i r st
i nvent or y change f or change i n pr i ces
t wo connect i ons wi t h . const ant - dol l ar measur ement .
i s si mpl y t o adj ust
shi pment val ues ( i n t he pr i vat e sect or )
by t he i nvent or y change i n t he per i od t o det er mi ne t he cur r ent val ue
of pr oduct i on or pur chase.
Thi s aspect
t he r evol vi ng f und of DOD.
I f i t wer e deci ded t o t r eat t hi s f und as
a pr ogr am i n i t s own r i ght ,
t r ansact i ons,
i s r el at ed t o t he quest i on of
r at her t han t o i gnor e i n- house pur chase
t hen some met hod of est i mat i ng cons t ant - dol l ar f l ows
t hr ough t he f und i s essent i al .
I t woul d be advi sabl e t o def l at e
ent r i es i nt o t he f und by t hei r pur chase pr i ces and " sal es" by t hei r
est i mat ed sal es pr i ces,
r at her t han t o at t empt a combi ned def l at or
f or t he change i n t he i nvent or y.
I nvent or y change def l at i on can be of
i mpor t ance,
al so,
t i ons wher e t he pr oduct i on cycl e i s l ong- - shi pbui l di ng,
mi ssi l es or communi cat i ons syst ems.
obt ai n a pr oduct i on measur e,
i n oper a
const r uct i on,
I f t he def l at or i s t o be used
whi ch i s t o be used t o assess
to
pr oduc t i vi t y
86
change,
t hen t he goods- i n- pr oces s- i nvent or y def l at or i s desi r abl e.
Thi s wi l l
go par t way,
at
l east ,
i n mat c hi ng man- hour s t o pr oduct i on,
r at her t han mi s- mat c hi ng cur r ent man- hour s and del i ver i es,
whi ch may
have been i n pr oduct i on many mont hs.
7.
I mput at i ons
I t i s nei t her pr act i cal
pr i ce i ndexes f or al l
st ead,
nor necess ar y t o pr i ce and const r uct
goods and ser vi ces i n t he mi l i t ar y budget .
a sui t abl e r epr esent at i ve sampl e of pr oduct s wi l l
t or y f or t he pur pose ( see sect i on on sampl i ng) .
however ,
Thus,
I n
be sat i sf ac
The wei ght s used,
shoul d cover t he ent i r e uni ver se of pr oduct s and ser vi ces.
t he i t ems pr i ced i mpl i ci t l y r epr esent
Ther e ar e i nst ances when i t wi l l
t he unpr i ced i t ems.
be f ound f easi bl e t o r epr esent
t he pr i ce movement of an unpr i ced i t em— expl i ci t l y.
means of di r ect
Thi s i s done by
i mput at i on of t he i t em' s pr i ce movement t o t hat of
anot her pr oduct ,
t hat t he pr i ce anal yst
has good r eason t o bel i eve
moves si mi l ar l y.
Rel at i vel y l ess i mpor t ant ai r cr af t mi ght
t o have pr i ce movement s si mi l ar t o t he ai r cr af t pr i ced,
be assumed
f or exampl e,
or t he pr i ce of one t ype of unpr i ced t y pewr i t er mi ght be pr esumed
t o change i n t he same way as a pr i ced t ypewr i t er .
I t i s i mpor t ant
t hat pr i ce i ndexes f or t he unpr i ced i t ems be i dent i f i ed and t est ed
on t he basi s of r easonabl eness and out si de qual i t at i ve i nf or mat i on.
Al l
i t ems not pr i ced or handl ed by means of di r ect
ar e i mpl i ci t l y handl ed by i ndi r ect
i mput at i on.
met hod of i ndex cal c ul at i on ( i mpl i ci t l y)
i mput at i on
Thi s means t hat t he
assi gns t he aver age pr i ce
movement of t he pr i ced and di r ect l y - i mput ed t er ms t o t he ot her i t ems
87
by means of t he i ndex wei ght i ng st r uct ur e.
at t he l evel
of t he t ot al
Thi s may be car r i ed out
i ndex or mor e r easonabl y at
of some pr oduct cl ass or subgr oupi ng.
Thi s as si gnment
t he l evel
i s ac compl i shed
when t he i ndex maker assi gns each commodi t y a wei ght ( val ue)
35/
own, pl us t he val ues of t he unpr i ced commodi t i es.
35/
of
its
I n t he absence of knowl edge t he wei ght s of
one pr oduct cl ass
of unpr i c ed i t ems ar e di st r i but ed among t he pr i ced i t ems i n
pr opor t i on t o t he val ues of t he di r ect l y pr i ced and di r ect l y
i mput ed i t ems i n t he same pr oduc t cl assi f i cat i on. When ent i r e
cl asses of pr oduc t ar e unpr i ced, t hei r val ues may be di st r i but ed
among t he next hi gher cl as si f i cat i on or gr oupi ng of pr oduct s.
88
PRODUCTI VI TY AND PRI CE I NDEXES
I V.
A.
Backgr ound
Chapt er
I I on I ndex For mul ae shows t hat one way i nput
out put - pr i ce i ndexes ar e r econci l ed i s t hr ough physi cal
of
i nput per uni t of out put .
r el at i onshi ps:
of pr oduct i on,
per mi l e,
gal l ons of f uel
i mpor t ant ;
ar eas of
et c. ( The f or mul ae deal t
uni t mat er i al s r equi r ement s and
uni t man- hour r equi r ement s and t hei r r eci pr ocal s,
of mat er i al
l and per uni t
machi ne hour s per uni t
man- hour s per uni t of pr oduct i on,
wi t h t wo of t he most
measur es
Theor et i c al l y , t hese " i nput - out put "
measur es coul d cover a host of
of out put ,
and
out put per uni t
and out put per man- hour . ) Thi s chapt er wi l l
t he l at t er meas ur e ( uni t man- hour r equi r ement s)
deal
wi t h
par t l y because much
mor e pr act i cal
wor k has been done i n t hi s f i el d t han i n t he measur eV
ment of mat er i al s r equi r ement s per uni t
and because, at l east
i n t he shor t r un,
t he mat er i al - i nput
r el at i onshi p appear s t o be mor e
st abl e t han l abor r equi r ement s per uni t .
Fi r st ,
some gener al
pr oduc t i vi t y f or mul ae ar e exami ned,
by ex ami nat i on of t he t ypes of
f ol l owed
i ndexes now i n cur r ent pr ogr ams.
Then,
some obser v at i ons ar e made concer ni ng speci f i c needs of t he DOD
i nsof ar
as t ypes of i ndexes ar e concer ned.
Because t hi s paper has
t he const r uc t i on of pr i ce measur es as i t s pur pose,
at t empt
1/
t her e i s no
t o pr ovi de an exhaus t i ve t r eat ment of meas ur ement
syst ems
a br oad basi s, t hat i s, The U. S. Depar t ment of Agr i cul t ur e
has done much wor k on f er t i l i z er - c r op st udi es, r ai nf al l and
cr ops; and i ndust r i es ar e cont i ni wt t sl y doi ng r esear ch on use of
mat er i al s and on out put and pr oduc t i vi t y of machi ner y.
89
as compl ex as pr oduct i vi t y.
meas ur ement
I nst ead,
t hose aspect s of pr oduc t i vi t y
t hat seem t o have a bear i ng on pr i ce meas ur ement wi l l
be
pr esent ed.
For mor e det ai l
on concept s,
pr oduc t i vi t y meas ur ement
l i mi t at i ons,
hi st or y,
and scope of
t he r eader i s r ef er r ed t o t he numer ous publ i
cat i ons i n t hi s f i el d and t o t he st af f of t he Of f i ce of Pr oduc t i vi t y
and Technol ogy,
Bur eau of Labor St at i st i cs.
i nt er est ed i n t he subj ec t si nce t he f i r st
Car ol !
D.
Wr i ght ,
Gover nment has been
Commi s si oner of Labor ,
sponsor ed a st udy of 68 i ndust r i es i n 1898.
depr es si on year s of t he 1930' s,
Nat i onal
The U. S.
Dur i ng t he
t he Wor ks Pr ogr ess Admi ni st r at i on s
Resear ch Pr oj ect pr epar ed i ndust r y dat a f or 59 manuf act ur i ng
i ndust r i es,
19 mi ner al s i ndust r i es,
BLS t ook over t he wor k,
and agr i cul t ur e.
I n 1940 t he
but Wor l d War I I dat a pr obl ems made i t
necess ar y t o cut back on t he number of i ndust r i es bei ng st udi edThe pr ogr am ex panded i n t he i mmedi at e post - war year s t o cover i n
di vi dual
H
pl ant
st udi es.
St udi es of t echnol ogi cal
change,
i ndust r y
See: Magdof f , Har r y, I r vi ng H. Si egel , and Mi l t on B. Davi s,
Pr oduct i on, Empl oyment , and Pr oduc t i vi t y i n 59 Manuf act ur i ng I ndust r i es:
3 par t s" ; Wor ks Pr ogr ess Admi ni st r at i on, Nat i onal Resear ch Pr oj ec t , _
May 1939. Spencer , Vi vi an E. , " Pr oduct i on, Empl oy ment and Pr oduc t i vi t y
i n t he Mi ner al Ext r act i ve I ndust r i es 1880- 1938, " WPA,
NRP. June 1940.
90
st udi es,
B.
and br oad sect or st udi es ar e car r i ed on cur r ent l y.
Gener al
For mul at i on
I t i s mor e conv eni ent
t o pr esent
qui r ement s t han t hei r r eci pr ocal ,
been pr esent ed,
t he uni t
i ndexes of uni t man- hour r e
out put
per man- hour .
Much t hat has
r el at i ng t o f or mul ae f or pr i ce i ndexes,
l abor r equi r ement s measur es as wel l :
nat ur e of Laspeyr es and Paasche uni t man- hour
appl i es t o
t he compl ement ar y
and pr oduct i on i ndexes,
f or exampl e. . Thus:
( 29)
El
i Qi
E 1i Q i
Z 1 Qi
El
oQo
S ^ i
Z
] o Q0
El . Q
2 1 oQo
E l i Qi
'
2 1 iQo
wher e t he not at i ons ar e t he same as i n f or mul ae 17 t o 25 i n Chapt er I I .
These f or mul at i ons ar e t he ones gener al l y pr ef er r ed f or measur es
of physi cal
pr oduc t i vi t y change.
I nasmuch as t hey ar e f r ee of monet ar y
3/ See " Out put per Man- hour Measur es: Pr i vat e Economy" , Out put per Man
hour Measur es: I ndust r i es and " Technol ogi cal Change" — Handbook of
Labor St at i s t i c s , Bul l et i n 1458, Bur eau of Labor St at i st i cs, Oct ober
1966;
Mar k , J er ome A. , " I ndust r y I ndexes of Out put per Man Hour , " Mont hl y
Labor Rev i ew, November 1962
Si egel , I r vi ng H. , " Concept s and Meas ur ement of Pr oduct i on and
Pr oduct i vi t y; 1 Wor k i ng Paper of t he Nat i onal Conf er ence on Pr oduc
t i vi t y, 1952;
Evans, Duane W. , and I r vi ng H. Si egel " The Meani ng of Pr oduct i vi t y
I ndexes " Jour nal of t he Amer i c an St at i st i cal Associ at i on, Mar ch 1942;
" Out put , I nput , and Pr oduct i vi t y Measur ement , " Vol ume 25, St udi es
i n I ncome and Weal t h, Pr i ncet on Uni v er si t y Pr ess, Pr i ncet on, N. J. ,
1961;
Sear l e, Al l an D. , " Rel at i onshi ps Bet ween Pr oduc t i vi t y Measur es, "
Mont hl y Labor Rev i ew, May 1954;
‘‘Tr ends i n Out put per Man- Hour and Man- Hour s per Uni t of Ou t p u t Manuf act ur i ng 1939- 53, " BLS Repor t 100, 1955.
" Pr oduct i vi t y: A Bi bl i ogr aphy . " BLS Bul l et i n No. 1226, 1958; No.
1514, 1966; and No. 1776, 1972.
91
val ues,
t hey ar e mor e near l y sui t abl e t han ar e t hose wi t h monet ar y
wei ght s f or t echnol ogi cal
st udi es or f or anal ysi s of physi cal
pr oduc
t i vi t y change i n r el at i on t o wage and ot her cost s and pr i ce changes.
The man- hour measur e,
t o t ype or ski l l
^ . q.
l evel
E 1 bQ0 , i s unwei ght ed wi t h r espect
/
of l abor i nput .
I n ot her wor ds, man- hour s
ar e t r eat ed as homogeneous.
Thi s f or m of man- hour i ndex i s not consi s t ent wi t h t he pr i ce and
const ant
f ar .
dol l ar
( def l at ed val ue)
i ndexes,
I n or der t o demons t r at e t hi s,
whi ch have been di sc us sed so
i t woul d be hel pf ul
i f t he r eader
woul d t ur n t o f or mul a 22 i n Chapt er I I , wher e r el at i onshi ps bet ween
uni t l abor cost ,
aver age hour l y ear ni ngs,
and uni t man- hour r equi r ement s
ar e shown.
Usi ng t he not at i ons der i ved ear l i er ,
W/ Q = e* l
f or mul a 22 pr esent s one way of der i vi ng a di f f er ent
ki nd of man- hour
i ndex— one i n whi c h a di st i nct i on i s made among var i ous cat egor i es
of l abor t i me on t he basi s of wage r at es.
Fr om For mul a 22:
W/ Q
I ndex
I ndex
e
1
Der i ve-
/
Z
e 1 Q
z e, l
Q
1 0 0
/
Z
e 1 Q
0 0 1
£
h ei %
/
E
V
=
Z
=
=
e. l . Q
1 10
0
O i
i ^
92
I ndex
Q
( 30)
Q
4/
Wr ( W/ QJ
2 ei ^ i Qi
E e i ^ i Qo
E e- f l î Qt
y £„ 1 Q
L
o cr o
y e 1 Q
L o cr o
^
Z l 1e i Q0
E ei ni^i
E e i Mi
¥
1%
M = 1• Q
M
2
V
A
Thi s man- hour i ndex i s t he s ame i ndex t hat woul d be der i ved
di r ect l y by def l at i ng a payr ol l l i ne i t em by a wage- r at e i ndex of
t he same gener al f or m as t he Laspeyr es pr i ce i ndexes descr i bed
above:
( 32)
M=
Z e . l . 0.
1 1X1
y
h
E e 1 Q
Ü
000
M = W/ E
e. l Q
1 0^ 0
e 1 Q
0 00
y e • 1. Q.
^
1 - pi
T T " Q
i 00
For mul ae 17 t hr ough 25 and 30 t hr ough 32 pr ovi de cons i s t ent measur es
f or val ue,
l abor cost ,
pr oduct i on,
payr ol l ,
man- hour s,
uni t man- hour r equi r ement s,
wage and sal ar y r at es,
mat er i al
cost s,
uni t
physi cal
4/ Thi s pr oduct i on i ndex i s not t he same as but i s a component of t he
pr oduc t i on i ndex der i vabl e by di vi di ng a t ot al - val ue i ndex by t he
pr i ce i ndex of f or mul a 17. I ndex " Q" above i s t he pr oduct i on i ndex,
whi ch can be der i ved f r om an i ndex of payr ol l s and t he uni t l abor
cost i ndex, shown as t he second t er m of t he r i ght member of f or mul a
18. Thi s out put i ndex ( wi t h uni t l abor cost wei ght s) t oget her wi t h
an out put i ndex wi t h uni t mat er i al cost wei ght s ( bot h of Paasche
f or m) , wei ght ed t oget her pr oper l y, pr ovi de t he quant i t y i ndex,
cons i s t ent wi t h f or mul a 17.
93
mat er i al
mat er i al
r equi r ement s,
uni t mat er i al
cost s,
mat er i al
pr i ces,
uni t
r equi r ement s and out put pr i ces.
As st at ed i n Chapt er I I ,
t he f or mul ae l i nki ng i nput s and out put
pr i ci ng ar e based on t he Laspeyr es f or m of t he pr i ce i ndex, as ar e
5/
f or mul ae 30 t hr ough 32.
Thi s i s not t he key poi nt bei ng made, however .
What
i s cent r al
i s t hat t he man- hour
i ndex ( c onst ant - dol l ar payr ol l s)
i s a wei ght ed i ndex, wher ei n each t ype of man- hour
or gr ade l evel )
f er ent al
( e. g. ,
by oc cupat i on
i s wei ght ed wi t h t he wage r at e as an i ndi cat or of di f -
qual i t y of j ob t o be per f or med, wher eas t he man- hour i ndex
t r adi t i onal l y associ at ed wi t h pr oduc t i vi t y meas ur ement t r eat s var i ous
ski l l - l evel s as homogeneous.
Si mi l ar l y,
wi t h t hi s set of
t he t r adi t i onal
C.
t he uni t man- hour i ndexes di f f er .
i ndexes i s compat i bl e wi t h uni t
The one cons i s t ent
l abor - cost wei ght s;
i ndexes use pr oduc t i on wei ght s.
Need f or Pr oduc t i vi t y Measur e i n Pr i ci ng
Ther e ar e t wo l evel s at whi c h pr oduc t i vi t y measur es woul d be us e
f ul
f or a mi l i t ar y pr i ce i ndex.
f or m of mi l i t ar y " out put "
Fi r st ,
t hey woul d be needed t o est i mat e some
pr i ces under a conc ept s i mi l ar t o cost - pr i ce
i ndexes, ment i oned i n Chapt er
II.
Concept s and For mul at i ons.
Thus a
5/ Wi t hout depar t i ng f r om t he Lapeyr es f or m of pr i ce i ndex i t shoul d
— be. ment i oned t hat f or mul ae 23 and 23a show al t er nat i v e ear ni ngs
and uni t manhour i ndexes. Thes e coul d be used t o der i ve compar abl e
pr oduc t i on and manhour i ndexes,
but t hi s has not been done. They
woul d st i l l t r eat man- hour s as nonhomogeneous.
94
pr i ce i ndex f or mat er i al s and equi pment woul d be adj ust ed by an i ndex
af man- hour s,
r equi r ed t o per f or m a speci f i c t ask, wi t h t he equi pment
( uni t man- hour s)
t o ar r i ve at an est i mat ed pr i ce i ndex ( cost of doi ng
t he same speci f i c t ask) .
l evel
of
The pr oduc t i vi t y i ndexes needed f or t hi s
i ndex cons t r uc t i on woul d be measur es t hat deal
t i vi t y wi t hi n DOD.
They woul d answer t he quest i on,
wi t h pr oduc
" How ef f ect i v el y
ar e t he pur chased goods and ser vi ces of DOD per sonnel
bei ng used i n
r el at i on t o t hei r pur pose?"
Second,
pr oduc t i vi t y measur es ar e needed i n t hose i nst ances wher e
t he c ompl exi t y of t he good pur chased i s such t hat a pur chase pr i ce i ndex
cannot
be cons t r uc t ed di r ect l y.
t o t he r ecor ds of cont r act or s,
oper at i ons,
adj ust
I nst ead,
i t woul d be necess ar y t o r esor t
pr epar e i nput pr i ce measur es f or t hei r
f or pr oduc t i vi t y change t o est i mat e cont r act or s'
out put pr i ce i ndexes and combi ne t hese t o cons t r uc t an est i mat ed i nput
pr i ce f or DOD.
t r act or S'
I n some i nst ances i t mi ght
dat a , al so.
be necess ar y t o use subcon-
The pr oduc t i vi t y measur es needed f or t hi s pur pose
ar e not t he DOD uni t man- hour s but t he pr oduc t i vi t y i ndexes f or t he
£/
i ndust r y f ur ni shi ng t he pr oduct .
D.
Av ai l abi l i t y of Pr oduc t i vi t y I nf or mat i on
1•
Sel ect ed I ndust r y Pr oduc t i vi t y I ndexes
Pr oduc t i vi t y i nf or mat i on by pr oduct or br oad cl assi f i cat i on
of pr oduc t
i s al most
t ot al l y l acki ng on a cont i nui ng basi s.
The BLS
6/ St r i ct l y speaki ng, t he meas ur es shoul d r ef er onl y t o t hat par t of
t he i ndust r y' s out put whi ch i s appl i c abl e t o mi l i t ar y pur chase, not
t o t he t ot al act i vi t y of t he i ndust r y.
95
publ i shes annual
f or about
i ndexes accor di ng t o an i ndust r y cl as si f i cat i on,
however ,
40 i ndust r i es. - ^ Al t hough t hese i ndexes ar e t heor et i cal l y c on
st r uct ed i n conf or manc e wi t h t he f or mul a descr i bed i n Chapt er
II
( no.
26) ,
i t i s r ar el y possi bl e t o obt ai n uni t man- hour wei ght s f or i ndi vi dual
pr oduct s and var i ous compr omi ses f r om concept ar e necessar y,
qui r i ng t he use of pr i ces or uni t val ues as wei ght s.
of t en r e
For t unat el y,
t he
f ai l ur e t o cons t r uc t pr oduct i on i ndexes wi t h uni t man- hour wei ght s may
r edound t o t he benef i t of maker s of mi l i t ar y pr i ce i ndexes t o t he ext ent
t hat
t he val ue wei ght s ar e mor e near l y cons i s t ent wi t h i nput pr i ce c on
cept s.
The BLS pr oduct i vi t y ser i es shoul d be exami ned and consi der ed
ser i ousl y as a means of est i mat i ng DOD i nput
pr i ce i ndexes f r om cont r act or s'
i nput
pr i ces,
( cont r act or s
out put )
wher e cont r act or s
out put
pr i ces ar e unavai l abl e.
2.
I ndust r i al
Pr oduct i on and Man- Hour s
Unf or t unat el y,
i s l i mi t ed,
t he number of publ i shed pr oduc t i vi t y i ndexes
but i t i s possi bl e t o pr epar e est i mat es usi ng pr oduct i on
i ndexes of t he Feder al
Reser ve Boar d ( FRB) and man- hour s f r om BLS or
8/
t he Bur eau of t he Cens us . some FRB " pr oduct i on"
hour s.
Car e must
be exer ci sed,
however ,
because
i ndexes ar e i n r eal i t y est i mat es based on man
Thei r use i n pr oduc t i vi t y meas ur ement
l eads t o r edundancy.
7/ See " I ndexes of Out put per Man- Hour - - Sel ec t ed I ndust r i es, 1973,
" Bul l et i n 1780, Bur eau of Labor St at i st i cs, U. S. Depar t ment of Labor .
8/ The BLS and Census man- hour s dat a di f f er i n concept .
BLS i ncl udes
hour s pai d f or but not wor ked ( e. g. , pai d vacat i ons, st and- by t i me) ;
Census cover s hour s wor ked onl y.
96
3.
Def l at ed Val ues and Man- Hour s
The BLS publ i shes mont hl y pr i ce i ndexes f or over 140 agr i c ul
t ur al ,
manuf act ur i ng and mi ni ng i ndust r i es at t he 4- di gi t
I ndust r i al
Cl assi f i cat i on)
l evel
of det ai l . -
( St andar d
Thes e pr i ce i ndexes ar e
cons t r uc t ed accor di ng t o a modi f i cat i on of t he Laspeyr es i ndex f or mul a.
They can be used t o def l at e Census dat a on val ue of shi pment s of pr o
duct i on f or t he same i ndust r i es,
i ndexes.
nat el y,
t he I SPI
Thi s appr oach cannot
t o obt ai n cons t ant - dol l ar of out put -
be used f or al l
because compar abl e man- hour dat a ar e l acki ng.
pr ogr am pr omi ses t o gr ow.
i ndexes shoul d use t hese def l at or s,
est i mat es,
unf or t u
Never t hel ess,
Thos e const r uc t i ng mi l i t ar y pr i ce
t oget her wi t h val ue of shi pment s
or pr oduc t i on and compar abl e man- hour dat a,
4.
i ndust r i es,
t o cons t r uc t pr oduc t i vi t y
when mor e di r ect appr oaches ar e unav ai l abl e.
Lear ni ng Cur ves
Wher e dat a on man- hour s ar e mai nt ai ned f or each uni t or gr oup
of uni t s of a speci f i ed pr oduct ,
f or t he pr oduct ,
and i n t he absence of pr i ce i nf or mat i on
l ear ni ng cur v e dat a may be used t o adj ust c ont r ac t or s 1
i nput pr i ces t o est i mat e DOD i nput pr i ces.
Thi s met hod may be f ound
f easi bl e f or subpr oduct s as shi pbui l di ng and ai r cr af t made i n pr i vat e
yar ds or pl ant s.
For gover nment
pl ant s,
t he DOD pur chase
pr i ce i ndex
woul d i ncl ude onl y t he mat er i al s i nput s and t he l ear ni ng cur ve ( or
ot her pr oduc t i vi t y measur e) woul d be i r r el evant .
9/
For t he mi l i t ar y
For l i st , see:
mont hl y r epor t Whol es al e Pr i ces and Pr i ce I ndexes
and f or desc r i pt i on see Lawr ence, Mar y E. , " I ndust r y Sect or I ndexes, "
Chapt er 12, Handbook of Met hods, 1971, Bul l et i n 1711, Bur eau of
Labor St at i st i cs, U. S. Depar t ment of Labor .
9 7
out put
pr i ce i ndex ( i f devel oped) ,
however ,
t he i n- house pr oduc t i vi t y
meas ur es - - ! ear ni ng cur ve or ot her meas ur es — woul d be r el evant .
5.
Gover nment Pr oduc t i vi t y Measur es
The i ndexes desc r i bed abov e may meet some needs f or pr oduc
t i vi t y measur es i n t hose i nst ances wher e i t i s necessar y t o est i mat e
i nput
pr i ce i ndexes i n t he absenc e of di r ect
measur es,
whi ch r ef er t o DOD act i vi t y i t sel f ,
pr i ce i ndexes,
i nput
pr i ce dat a.
Pr oduc t i vi t y
ar e necessar y t o adj ust
t o ar r i ve at an est i mat e of " out put
pr i ce" or t o adj ust
pr i ce measur es f or t he ef f ect i v enes s of a pur chased pr oduct
. Br oad,
agency - wi de hi st or i cal
ar e l acki ng.
i n use.
measur es of uni t - l abor r equi r ement s
A r ecent r epor t st at es,
" Al t hough Gover nment agenci es
made a f ew i sol at ed ef f or t s t o meas ur e t he pr oduc t i vi t y of t hei r ent i r e
or gani zat i ons or oper at i ng uni t s dur i ng t he 1950' s,
ef f or t was made unt i l
Budget
( 0MB)
1962.
I n 1962,
i ni t i at ed a pr oj ect
t he Of f i ce of Management and
t o expl or e t he poss i bi l i t y and us e
f ul ness of pr oduct i vi t y meas ur ement
t he Post al
no concent r at ed
i n f i ve gover nment or gani zat i ons:
Ser v i c e i n i t s ent i r et y and one or gani zat i onal
f r om t he Depar t ment
of t he Tr easur y,
Vet er ans Admi ni st r at i on,
Avi at i on Admi ni st r at i on and Depar t ment of t he I nt er i or .
demons t r at ed t hat
el ement each
Feder al
The st udy
pr oduc t i vi t y measur es coul d be pr epar ed f or f our out
of f i ve of t he pi l ot or gani zat i ons and concl uded t hat dev el opment of
val i d pr oduc t i vi t y meas ur es was f easi bl e f or a consi der abl e por t i on of
Feder al
Gover nment act i vi t i es.
" Wi t h t he not abl e ex cept i on of wor k per f or med i n t he Post al
t he Soci al
Secur i t y Admi ni st r at i on and t he Feder al
Ser vi ce,
Av i at i on Admi ni st r at i on,
98
ver y l i t t l e addi t i onal
wor k on pr oduc t i vi t y meas ur ement occur r ed
10/
dur i ng t he 1960' s. " —
6.
The Joi nt Meas ur ement Syst ems Pr oj ect
Economi c
Wi t h t he encour agement of t he Joi nt
U. S.
Congr ess i n 1970,
mi ssi on,
t he Gener al
Ac count i ng Of f i ce,
and Of f i ce of Management and Budget
Commi t t ee of t he
Ci vi l
under t ook an ev al uat i on of
t he f eas i bi l i t y of measur i ng pr oduc t i vi t y i n t he Feder al
These ef f or t s l ed t o what
Gener al
Ser vi ces Admi ni st r at i on ( GSA)
I mpr ovement
Gover nment .
i s now a cont i nui ng pr oj ect under 0MB and t he
admi ni st r at i ve l eader shi p and
gui dance t o i mpr ove dat a and met hodol ogy.
ment
Ser vi ce Com
The Joi nt
Pr ogr am ( JFMI P) and BLS wi l l
Fi nanci al
Manage
j oi nt l y under t ake anal ysi s
of t he r esul t s.
The new pr ogr am was t o cover appr ox i mat el y 60 per cent
wor k f or ce.
I t now appear s t hat st i l l
gr eat er cover age may be r eal i zed- -
possi bl y 65 per cent or mor e. “ ^ I n al l ,
Depar t ment of Def ense,
E.
45 agenci es,
Fi nanci al
Management
I mpr ovement
Pr ogr am
Out put
The meas ur ement
of out put r equi r ed t he i dent i f i cat i on,
l ect i on and compi l at i on of dat a on speci f i c t asks,
10/
i ncl udi ng t he
ar e par t i ci pat i ng.
Met hodol ogy of Joi nt
1.
of t he Feder al
c ol
whi ch t he i ndex
" Feder al Pr oduc t i v i t y - - Met hods , Measur ement s, Resul t s, " a st af f
st udy t o det er mi ne t he f eas i bi l i t y of devel opi ng pr oduc t i vi t y i n
dexes f or t he Feder al sect or , j oi nt 0MB, CSC, GAO Pr oj ect , August
1972.
Ear l i er st udi es i ncl uded " Technol ogi cal Changes and Empl oy
ment i n t he U. S. Post al Ser vi ce, Mont hl y Labor Rev i ew, Oct ober
1932; Sear l e, Al l an D. , " Pr oduct i v i t y Changes i n Sel ect ed War t i me,
Shi pbui l di ng Pr ogr ams, " Mont hl y Labor Rev i ew, December 1948;
Mi ddl et on, Kennet h A. , " War t i me Pr oduc t i vi t y Changes i n t he Ai r
f r ame I ndust r y, " Mont hl y Labor Rev i ew, August 1945.
11/ " Measur i ng and Enhanci ng Pr oduc t i vi t y i n t he Feder al Gover nment , "
Ci vi l Ser vi ce Commi ssi on, Gener al Ac count i ng Of f i ce and Of f i ce of
Management and Budget , June 1973, page 1.
99
maker s def i ned as out put s ( di scussed l at er ) .
i t i es as soi l
sur vey r epor t s,
engi ne over haul ,
Among t hese ar e such ac t i v
cont r act s admi ni st er ed,
and weat her obser vat i ons.
A t ot al
of
pat ent di sposal s,
114 " or gani zat i on
el ement s" wi t hi n t he 45 agenci es submi t t ed dat a f or 605 out put s.
submi t t ed 110 out put s f r om 31 el ement s i n t he Ai r For ce,
12/
Def ense Suppl y Agency . — The r epor t
Ar my and
i ndi cat ed t hat DOD pr oduc t i vi t y
est i mat es cover 32 per cent of t he t ot al
y ear 1971,
Navy,
The DOD
man- year s of t he agency i n f i scal
compar ed t o 53. 4 per cent f or al l
par t i ci pat i ng agenci es.
Out put dat a wer e al so cl assi f i ed i n r ough qual i t y cat egor i es:
•
di r ect - - out put di r ect l y measur es wor k per f or med,
e. g. ,
engi nes over haul ed.
•
par t i al - - out put measur es par t of wor k compl et ed,
e. g. ,
pr oc ur ement cont r act s cl osed.
•
pr ox y — out put meas ur e ser ves as a pr oxy f or wor k done,
e. g. ,
pat i ent s admi t t ed.
•
popul at i on suppor t - - out put meas ur es popul at i on bei ng ser ved,
e. g. ,
base per sonnel
ser ved.
Accor di ng t o t he dat a pr esent ed, near l y 85 per c ent of t he out put s ( on
t he basi s of man- year s wor ked)
account i ng f or par t i al
ar e di r ect measur es wi t h 5 per c ent mor e
measur es.
DOD i s not shown separ at el y,
but a
cur sor y exami nat i on of t hese ser i es r eveal s t hat 91 of t he 110 out put s
ar e ei t her di r ect or par t i al
measur es.
Thes e f i gur es wer e not eval uat ed
i n t er ms of man- year s wor ked.
12/
For t he l i st of el ement s and out put s, see " Feder al Pr oduct i vi t yMet hods, Measur ement s, Resul t s, " op. c i t . , pages 100- 116.
10 0
Anot her t ype of cl as si f i cat i on shows t hat 71 per cent of t he t ot al
gover nment out put s ar e " f i nal " out put s ( i . e. ,
per f or manc e of
t he mi ssi on)
and t he r est i nt er medi at e ( not t he s pe
ci f i c pr oduct of t he mi ssi on) .
f i nal
di r ect l y as soci at ed wi t h
I t i s poi nt ed out
out put i s t o be pr ef er r ed;
t hat f or some pur poses
f or ot her pur poses i t i s sat i sf act or y,
as l ong as t he dat a ar e mut ual l y excl usi ve.
11/
The out put dat a ar e
combi ned as a l aspeyr es i ndex wi t h 1967 man- year s wei ght s.
2.
I nput
Two man- year i ndexes ar e const r uct ed:
one,
hour s associ at ed wi t h t he i nput s i n i ndex f or m;
of an i ndex of c ur r ent - dol l ar compensat i on,
def l at or f or Feder al
Gover nment gener al
si mpl y t he man
t he ot her ,
consi st i ng
di vi ded by an unpubl i s hed
empl oy ee compensat i on cover i ng
sal ar i es and f r i nge benef i t s.
3.
Pr oduct i vi t y I ndexes
Two out put - per - man- y ear ser i es ar e cons t r uc t ed f r om t he
wei ght ed out put
i ndex and t he t wo man- y ear ser i es.
ar e pr epar ed f or out put , man- year s ( 2 i ndexes) ,
I n addi t i on,
compensat i on,
( or r eal ) compens at i on usi ng t he Cons umer Pr i ce I ndex,
per man- year ,
r eal
compensat i on per man- year ,
l abor r equi r ement s and r eal
f or var i ous f unct i onal
13 /
uni t
l abor cost s.
def l at ed
compensat i on
uni t l abor cost ,
uni t
Det ai l s ar e avai l abl e
and pay- sy st em cat egor i es,
I b i d . , P a g e s 2 8 an d 29
i ndexes
al so.
101
4.
Qual i t y Change
I nf or mat i on was gat her ed on t he nat ur e of change i n out put
qual i t y or change i n f unct i on.
The i nf or mat i on was anal yzed,
but no
adj ust ment s wer e made- Many changes wer e sai d t o be of mi nor i mpor t ,
but some need f ur t her eval uat i on.
The BLS r ecogni zes t hi s,
es peci al l y
i f t he nat ur e of wor k changes so t hat ef f or t i s shi f t ed t o i mpr ov e
ment of mi ssi on or out put .
I f no adj ust ment i s made,
meas ur e i s under st at ed ( uni t man- hour s,
depot compl exes,
over st at ed) .
t he pr oduc t i vi t y
I n l ar ge mi l i t ar y
f or i ns t ance, par t of t he wor k was shi f t ed t o r ebui l
di ng st ocks, whi ch had become depl et ed»; but t he out put measur es,
on r equi si t i ons pr ocessed,
5.
based
do not r ef l ect t hi s.
Comment s
I n vi ew of t he dear t h of pr oduc t i vi t y i nf or mat i on f or t he
Feder al
Gover nment
i n t he past ,
t hi s pr oj ec t can be vi ewed wi t h
ent hus i asm and consi der abl e hope.
because out put of gover nment
ment ,
Because i t i s i n i t s i nf ancy and
i s of t en not amenabl e t o di r ect meas ur e
t he pr ogr am and i t s dat a ar e i n need of i mpr ovement ,
cooper at i ng agenci es t hemsel ves r ecogni ze.
For t hi s r eason t he dat a
cont r i but ed by DOD ar e r ecommended t o t hose who wi l l
t ar y pr i ce i ndex.
Caut i on s houl d be obser ved,
under t ake a mi l i
however ,
f or i t i s hoped
t hat t he needs f or bot h pr i ce and pr oduc t i vi t y ser i es wi l l
be r ei nf or c i ng mot i vat i ons wi t hi n DOD.
as t he
pr ove t o
The f ol l owi ng comment s concer n
not onl y t he nat ur e and qual i t y of t he dat a,
but t hei r concept ual
sui t abi l i t y f or t he var i ous t ypes of mi l i t ar y pr i c i ng i ndexes di s
cussed ear l i er .
10 2
a.
For mul a
Man- hour i ndexes,
duct i on i ndexes,
cons i s t i ng of aggr egat ed- hour s ;
cons i s t i ng of uni t man- hour wei ght ed physi cal
and qual i t y- wei ght ed uni t man- hour s ser i es ( f or mul a 29)
pr o
out put ;
ar e pr ef er r ed
t o i ndexes cont ai ni ng a pr i ce or wage el ement f or t echnol ogi cal
anal ysi s
I ndexes compar abl e t o t he var i ous def l at ed val ue ( const ant dol l ar )
ser i es,
however ,
shoul d cont ai n. a pr i ce or wage el ement
An exampl e was gi ven i n f or mul ae 30 and 31,
f or mul at i ons,
pr esent ed above.
But even i f some ot her pr i ce i ndex
t he uni t man- hour
i ndex pr ef er abl y woul d cont ai n t he dol l ar el ement ,
30 or 31.
Fi nanci al
Management
whi c h makes use of t he gover nment empl oy ee c ompen
sat i on def l at or s,
j ect .
al t hough t he f or mul a
For sake of compar i s on t he uni t
man- hour s and man- hour s dat a f r om t he Joi nt
Sy st em Pr oj ect ,
II)
compar abl e t o t he Laspeyr es
f or mul a i s chosen f or t he mi l i t ar y pr i ce i ndex,
woul d be di f f er ent f r om No.
( see Chapt er
ar e t o be pr ef er r ed f or t he mi l i t ar y pr i ci ng pr o
The BLS and t he cooper at i ng agenci es shoul d be encour aged t o
cont i nue const r uc t i ng i ndexes under t he var i ous choi ces desc r i bed i n
or der t o pr ovi de f or a br oad basi s of user needs.
Because val ue wei ght s ar e not empl oyed i n t he quant i t y i ndexes
of t he JFMI P,
ser i es)
wi l l
however ,
t he uni t man- hour
not pr ovi de t he best pr oduc t i vi t y ser i es f or t hi s pur pose.
Becaus e of t he di f f er ence i n concept
bet ween t he def l at ed- c ompensat i on
man- hour s i ndex and t he pr oduct i on i ndex,
whet her
i ndexes ( even t he wage def l at ed
i t may be necessar y t o t est
i t i s bet t er t o use t hi s i nt er agenc y pr oduc t i vi t y ser i es f or
103
t he sake of some concept ual
pur i ' . y of t he man- hour i ndex or t o s ac r i
f i ce t he pur i t y and t o use unwei ght ed man- hour s f or t he sake of c ompar a
bi l i t y of t he numer at or and denomi nat or of
b.
t he physi cal
pr oduc t i vi t y i ndex,
Out put el ement s
I t i s t oo much t o ex pect t hat t he out put s sel ect ed f or
t he pr oduct i vi t y pr ogr ams wi l l
cover t he same span f r om i nput s i nt o
DOD t o out put def i ned as mi ss i on ac c ompl i s hed—whi ch woul d be pr e
f er r ed f or t he mi l i t ar y pr i ce i ndex.
t o be used t o adj ust
t he DOD i nput pr i ce ser i es,
abi l i t y r equi r es an as sumpt i on t hat
mat er i al l y af f ect
I f t he pr oduc t i vi t y measur es ar e
t hi s l ack of c ompar
t he di f f er ence i n scope does not
t he pr oduc t i vi t y change meas ur e and t hat
i t i s bet t er t o make t he pr oduc t i vi t y adj ust ment
pr i ce i ndexes unadj ust ed.
as t he pr i ce meas ur ement
t han t o l eave t he
Deci si ons on t hi s scor e can be made onl y
pr oj ec t pr ogr esses,
and t hen on a c as e- by
case basi s.
Exhi bi t
I V—1 shows t he di st r i but i on of out put
r epor t ed f r om t he
var i ous par t s of DOD. Some i dea of t he scope of t he oper at i ons f or
whi ch dat a wer e submi t t ed can be gai ned f r om t he mi ss i on st at ement s.
For exampl e,
but i on,
t he Ai r For ce r epor t ed f or t he Logi st i cs Command
out put dat a on mat er i al s handl i ng,
and car e;
f or Logi st i cs Cor r mand Mai nt enance,
modi f i cat i on of equi pment .
i t ems pr ocessed"
passenger s,
i ncl udi ng r ecei pt ,
Di s t r i
st or age,
dat a f or r epai r and
Out put s ar e meas ur ed i n such t er ms as " l i ne
f or f r ei ght
and' t r anspor t at i on r equest s i ssued"
" engi nes compl et ed, "
f or
and" mi ssi l es pr ocessed. " Management
and pl anni ng f unct i ons wer e meas ur ed by " l i ne i t ems pr ocessed. "
EXHI BI T I V - 1— DI STRI BUTI ON OF OUTPUTS AND ORGANI ZATI ONAL
ELEMENTS— DOD- FY 1971
l umber of
ar gani zat i onal
el ement s
Agency
Number of out put s
Di r ect and
par t i al V/
Tot al
Ot her 2/
Tot al - - - - - - - - - - - -
31
no
91
19
Ai r F o r c e - - - - - -
4
29
29
0
Nav y - - - - - - - - - - - - -
7
27
22
5
Ar my - - - - - - - - - - - - -
19
47
36
11
Def ense Suppl y —
1
7
4
3
V Measur es based on al l or par t of wor k done.
2/ Pr oxi es and popul at i on suppor t : measur es based on quant i t y assumed t o r epr esent wor k
done- - see t ext .
Sour ce:
" Feder al
Pr oduct i vi t y:
Met hods,
Measur ement s,
Resul t s, " op. c i t .
105
The Navy Fi nance Cent er s had si mi l ar mi ssi ons and used s i mi l ar
out put meas ur es " i nvoi ces pai d, " " t r eas ur y checks i ssued, " et c.
t he i ndust r i al
oper at i ons,
however ,
For
such as Publ i c Wor ks Cent er s,
out
put s wer e " BTU' s gener at ed" or " cubi c yar ds of r ef use col l ect ed, " or
" shor t t ons handl ed. " Less sat i sf ac t or y pr obabl y i s " pr oduct i on ear ned
man- days"
f or shi ps over haul , whi c h i s a " st andar d- t i me" measur e.
The Ar my f ol l owed s i mi l ar pr ac t i c e— i t ems pr ocessed f or ov er head
or admi ni st r at i ve f unct i ons and mor e near l y quant i t at i ve uni t s f or
pr oduct i on f unct i ons ( i t ems r epai r ed by t ype account ed f or 28 of t he
47 ar my out put s r epor t ed) .
On t he ot her hand,
out put of some mi ssi ons
i s meas ur ed by i nappr opr i at e pr ox i es , such as " popul at i on ser ved,
to
meas ur e base ser vi ces and post suppl y oper at i ons and somet i mes f or
ut i l i t i es,
wher e a bet t er meas ur e shoul d be avai l abl e. Squar e f eet of
f l oor ar ea,
pr oper t y,
us ed t o measur e out put
i s i nadequat e al so.
pr oduc t i vi t y,
f or mai nt ai ni ng and r epai r i ng r eal
Thi s meas ur e coul d show an i ncr ease i n
i f some of t he wor k f or ce f ai l ed t o show up f or dut y
or i f ser vi ces wer e per f or med l ess f r equent l y.
as measur es f or educ at i on or f or f i r e f i ght i ng,
" Popul at i on ser v ed,
pr esent s s i mi l ar ano-
mal i e s .
The Def ense Suppl y Agency ( DSA)
t i ons" f or t he most
par t .
used " l i ne i t ems" and " r equi si
106
The JFMI P under t ook a speci al
of meas ur i ng non- physi cal
ment .
st udy t o expl or e t he f easi bi l i t y
pr oduct i on,
especi al l y r esear ch and dev el op
The f ol l owi ng possi bi l i t i es ar e di scussed:
( 1)
Publ i c at i on - Ci t at i on
Thi s i s es sent i al l y a met hod of wei ght i ng number
of r epor t s by t he f r equency each i s ci t ed by ot her s,
i n or der t o ar r i ve
at a mor e r eal i st i c pr oduct i on f i gur e t han a si mpl e publ i cat i on count
woul d pr ovi de.
i ng
The st udy ment i ons a negat i ve aspect :
st udi es ar e so f ar ahead of
at t ent i on unt i l
some wor l d s hak
t hei r t i me t hat t hey r ecei ve l i t t l e
year s af t er compl et i on.
Thi s obj ect i on was f el t t o
have l i t t l e i mpor t ance becaus e f ew r esear cher s ar e t hat
of
t hei r t i mes.
f ar ahead
Of mor e i mmedi at e concer n i s t he f ai l ur e of many
mer i t or i ous r esear ch pr oj ect s t o r ecei ve ci t at i on becaus e of
t hei r
s ecr et nat ur e or becaus e t hey ar e ot her wi se conduct ed f or i nt er nal
use onl y.
Ot her l i mi t at i ons ar e " mut ual
admi r at i on soci et i es" .
If
one at t empt s t o appl y st andar ds of sc i ent i f i c ex cel l ence t o an appl i ed
r esear ch act i vi t y or st andar ds of mor e i mmedi at e payof f
t al
or basi c r esear ch act i vi t y,
( 2)
t o f undamen
t he ev al uat i on woul d be mi sl eadi ng.
Peer Ev al uat i on
Thi s st udy r epor t ed t hat peer r anki ng i s used
f or basi c r esear ch and can be used f or r esear ch and devel opment pr o
j ect s.
W
Agr eement on t he r ank or der obt ai ned f r om di f f er ent peer gr oups
" Speci al St udi es of Meas ur ement Pr obl ems - Vol ume 1, Meas ur i ng
Resear ch and Devel opment and Gr ant Admi ni st r at i on Pr ogr ams, " Oc t ober
a st af f r epor t expandi ng on t he r epor t " Measur i nq and En
hanc i ng Pr oduct i vi t y i n t he Feder al Gover nment , " op. c i t .
107
i s sai d t o be " sur pr i s i ngl y good. " Among t he pi t f al l s i s t he t endency
of peer s t o emphas i z e s c i ent i f i c and t echni cal
r ange ex pect at i ons,
r at her t han shor t - r un us ef ul ness or cost ,
and per f or mance char act er i st i cs.
ment s.
know- how and l ongt i me
Management must suppl y t hese assess
The st udy st at es t hat a t i me ser i es of such a meas ur e mi ght
pr ovi de a qual i t y i ndex or ,
how wel l
t he j ob i s done,
( 3)
i f eval uat i ons i ncl ude an assess ment of
an appr oxi mat i on t o a pr oduc t i vi t y i ndex.
Cost - Benef i t Anal ysi s
I n t hose cases wher e t he devel opment and use of
an i nnovat i on ( pr oduct or pr ocess)
can be ant i ci pat ed,
possi bl e t o under t ake a cost - benef i t
anal ysi s of cost s ov er past
f ut ur e per i ods and r el at e t hese t o ex pect ed r et ur ns.
cont i nues t he st udy,
i t may be
and
Thi s can be done,
ei t her by di sc ount i ng cost s and benef i t s t o t he
pr es ent and compar i ng t hem or by cal cul at i ng a r at e of r et ur n necessar y
t o y i el d a net pr esent
15/
i nvest ment s.
val ue of zer o and compar i ng wi t h al t er nat i ve
For gover nment agenci es a cost - ef f ect i ve cal cul at i on may be made
f or i nnovat i ons,
such as new mi l i t ar y i t ems.
f l ow of benef i t s ov er t i me,
I nst ead of meas ur i ng t he
as descr i bed above,
t he cost s of a
15/ Those i nt er est ed i n pur sui ng t he met hodol ogy ar e r ef er r ed t o Qui nn,
J. L. . A Cat eqor i zat i on of t he Met hods and Techni ques of Measur i ng
I ndust r i al R&D Ac t i v i t i es , Ai r For ce I nst i t ut e of Technol ogy, Wr i ght
Pat t er son Ai r For ce base, SLTR 2- 71, Febr uar y 1971 and Cet r on,
M. J. and J. D. Gol dhaar . The Sci ence of Managi ng Or gani zed Techno
l ogy , New Yor k, Gor don and Br each, 1970.
108
spec i f i c i nnovat i on ar e meas ur ed agai nst
or al t er nat i ve i nnovat i ons.
cost s of pr es ent met hods
The st udy descr i bes sever al
DOD
ef f or t s t o use t hi s met hod i n connect i on wi t h mi l i t ar y equi pment
and mi ssi l es.
The di f f i cul t i es encount er ed i ncl ude t he cost of
t he case
st udi es t hemsel ves and t he f ai l ur e of some of t hese st udi es t o
el i mi nat e benef i t s t hat accr ue f r om sour ces out si de t he act i vi t y.
The r epor t concl udes t hat t hi s and t he ear l i er met hods ci t ed above
pr ovi de management wi t h usef ul
adequat e dat a f or st at i st i cal
i nf or mat i on but do not f ur ni sh
compi l at i on and aggr egat i on.
t ask f or ce conduc t i ng t he st udy coul d r ecommend no gener al
mance meas ur e f or Feder al
The as sess ment
The
per f or
Resear ch and Devel opment at pr esent .
i s sound i n so f ar as pr oduc t i vi t y i ndexes
ar e concer ned, and t he cost - ef f ec t i venes s met hod may never t hel ess
be wor t hwhi l e f or qual i t y adj ust ment
f or compl ex mi l i t ar y i t ems
( see sect i on on qual i t y adj ust ment ) .
( 4)
St andar d Ti me f or Tas k s .
The t ask f or ce di d not deal
pr i mar i l y,
wi t h t hi s met hod,
one woul d assume, becaus e t hey wer e st r i vi ng t owar d a
br oader meas ur e r el at ed t o end- pr oduc t s and goal s.
t i me i s t he most pr act i cal
appr oach t o meas ur ement ,
r edef i nes out put i n t er ms of
or
per sonnel
but
t he met hod
r el at i vel y ci r c umsc r i bed t asks and
f ai l s t o t ake account of t he goal
appl i ed t o r esear ch,
Use of st andar d
of t he r esear ch.
i s s i mi l ar t o use of
" t r avel
Thi s met hod,
voucher s cl ear ed"
act i ons" as a quant i t y meas ur e f or admi ni st r at i ve
109
and management f unct i ons.
The desi r ed obj ect i ve i s sacr i f i c ed on t he
al t ar of an at t ai nabl e meas ur e. I n r esear ch t hi s r et r eat may be mor e
ser i ous t han i n ot her f i el ds of endeavor ;
nat i ve,
but t her e may be no al t er
at l eas t f or t he pr esent .
A met hodol ogy based on st andar d t asks i s devel oped i n t he r epor t
16/
f or use i n i nst ances wher e out put i s di f f i c ul t t o measur e.
Two
measur es ar e di scussed.
One i s a per f or mance i ndex,
a r at i o of st andar d t i me,
di vi ded by act ual
f or each cur r ent
cur r ent man- hour s.
per i od t i mes quant i t y and
An i ndex of t hi s r at i o pr ovi des
a pr oduc t i vi t y measur e i n whi c h st andar d t i me
ual l y r eeval uat ed.
cons t r uc t ed as
henc e o u t p ut “ i s cont i n
The ot her meas ur e i s a pr oduc t i vi t y t i me ser i es,
const r uc t ed by mul t i pl y i ng quant i t y by st andar d t i me of a base
per i od,
summi ng,
and di vi di ng by act ual
The f or mer ser i es coul d decl i ne,
compar ed t o ex pect ed ( st andar d t i me)
t han yest er day' s per f or mance.
t he same t i me,
man- hour s.
i f t oday' s act ual
per f or mance,
i s r el at i vel y poor er
The l at t er ser i es coul d i ncr ease ov er
i f t oday' s man- hour out put
st andar d t i me of ei t her per i od)
f i ni t i on of out put cons t ant
per f or mance. ,
i ncr eased.
( measur ed by a const ant
Thi s concept hol ds t he de
and seems mor e near l y compar abl e wi t h t he
measur es of out put di sc us sed ear l i er .
16/ Mundel ' , Dr . Mar vi n" E. " Measur i ng Pr oduc t i vi t y of Gr ant s Admi ni st r a—
t i on Act i vi t i es, " Sect i on I I , Speci al St udi es of Meas ur ement Pr obl ems, Speci al Repor t No. 3, Joi nt Meas ur ement Syst ems Pr oj ect ,
Oc t ober 1973.
no
c.
Over head
The i nst r uct i ons cal l
wi t h each out put meas ur e,
f i nal
f or :
( 1) man- year s as soci at ed
( 2) man- year s associ at ed wi t h non- meas ur ed
out put s and ( 3) man- year s associ at ed wi t h admi ni st r at i on and
suppor t .
Thi s woul d pr oper l y al l ow var i at i ons i n over head t i me t o
af f ect t he pr oduc t i vi t y i ndex.
Ther e i s some concer n,
however ,
t hat
a number of agenci es r epor t di r ect l abor t i me onl y — a si t uat i on whi ch
BLS wi l l
seek t o r ect i f y.
Fr om t he i nf or mat i on on hand,
t he out put and pr oduc t i v i t y dat a
r ef er mor e t o t he admi ni st r at i ve and s uppor t oper at i ons,
r epai r ,
i ncl udi ng
t han t o t he pr i mar y oper at i on mi ssi on, wher eas many of t he
i nput pr i ces woul d cover new compl ex i t ems of equi pment whos e appr o
pr i at e pr oduc t i vi t y adj ust ment shoul d r ef er t o ef f ect i veness i n
r el at i on t o t he mi ssi on.
i nt er nal
To use pr oduct i vi t y measur es f or r epai r s or
ser vi ces as pr oxi es f or over - al l
a r at her bol d assumpt i on.
ef f ect i v enes s r equi r es
For t he pur chase of shel f i t ems t he necessar y
as sumpt i on may not be t oo bad.
d.
Qual i t y Change and Out put Mi x
17/
The summar y r epor t
al l y st at e t hat an i mpr ov ement
decl i ne,
V7/
i . e. ,
i ndi cat es t hat agenci es oc c as i on
i n ser vi ce has caused a pr oduc t i vi t y
t he meas ur e i t sel f t akes no account of qual i t y
" Measur i ng and Enhanci ng Pr oduc t i vi t y i n t he Feder al
op. ei t . , Pages 31- 33.
Gover nment
’
11
I l l
i mpr ovement .
I n ot her cases a det er i or at i on i n qual i t y of ser v i c e may
show up as a pr oduci vi t y i ncr ease,
t o measur e some of t he out put .
i nst ance,
but
and i n st i l l
ot her s t he i ndex f ai l s
I n l ar ge mi l i t ar y depot
compl exes,
f or
par t of t he wor k was shi f t ed t o r ebui l di ng depl et ed st ocks,
t he meas ur e of out put ,
al l owance f or t hi s.
based on r equi si t i ons,
These spur i ous pr oduct i vi t y changes need t o be
di st i ngui s hed f r om t he many changes ( i ncr ease)
l i ned oper at i ons,
i nt r oduct i on of comput er s,
The BLS f eel s t hat
what i s needed,
di d not make
an educat i onal
as wel l
ef f or t
st emmi ng f r om s t r eam
bet t er management ,
et c.
t o expl ai n t o r epor t er s
as i mpr ovement i n met hodol ogy,
wi l l
el i mi nat e
much of t hi s pr obl em.
Ther e seems some l i kel i hood,
al so,
t hat t he pr oduct i vi t y meas ur e
may mi ss i mpr ovement s t hat come f r om el i mi nat i on of
For exampl e,
t asks or pr ocesses.
i f a bet t er t ype of pai nt al l ows t he pai nt shop t o use
one i nst ead of t wo coat s,
pr oduc t i vi t y at
t he f i nal
out put st age wi l l
i ncr ease even t hough r emai ni ng const ant i n each depar t ment .
met hods r epor t does st at e,
per c ent of
t he cases;
however ,
t hat
and i n any event ,
f i nal
The
out put i s used i n 71
t he col l ect i on schedul e cal l s
f or not i ng such changes.
Meas ur ement of pr oduc t i vi t y f or such pr event i ve ser vi ces as f i r e
f i ght i ng can al so be di f f i cul t .
t er ms of f i r es f ought
per man- hour ,
due t o decr eased ef f i ci ency or ,
on f i r e pr event i on.
A seemi ng dr op i n pr oduc t i vi t y ( i n
f or exampl e)
spur i ousl y,
coul d be l egi t i mat el y
t o i ncr eased ef f or t spent
112
As i ndi cat ed,
shor t - r un pl ans i ncl ude ex t endi ng t he cur r ent i n
dexes anot her y ear wi t h mi nor i mpr ovement s and i nf or mi ng par t i ci pat i ng
agenci es of needs.
Ov er t he l onger r un t he pl ans i ncl ude
i mpr ov ement of met hodol ogy,
especi al l y wei ght s and i mput at i ons and
an i mpr oved comput er pr ogr am.
mi x pr obl ems,
At t ent i on wi l l
al so be gi ven t o pr oduct -
qual i t y change and t o t he appr opr i at eness of
t he par t i
cul ar measur es used.
F.
Concl usi ons
I t i s gr at i f yi ng t hat a cont i nui ng,
ur i ng
pr oduc t i vi t y i n t he Feder al
br oad based pr ogr am of meas
Gover nment has begun.
These dat a
ar e commended t o DOD f or use wher ev er possi bl e i n t he ef f or t t o adj ust
i nput pr i ce dat a f or pr oduc t i vi t y changes.
i mpr ovement
i s cal l ed f or .
Ther e ar e some ar eas wher e
The most i mpor t ant of t hese ar e:
Expansi on or r eemphasi s of t he p r ogr am shoul d be under t aken
t o i ncl ude out put s mor e cl osel y connec t ed wi t h t he mi ssi on
or pur pose of maj or expendi t ur es.
3•
Exi st i ng out put measur es,
based on pr oxi es,
by devel opi ng f i r mer measur es of out put .
shoul d be i mpr oved
I t appear s t hat
t hi s coul d be done i n a number of i nst ances.
3*
POD shoul d encour age f ur t her devel opment of
t hi s pr ogr am
For i t s own sake and t o f ur t her t he pr i ce meas ur ement ef f or t .
The def l at ed- c ompensat i on man- hour est i mat e shoul d be c on
t i nued al ong wi t h t he aggr egat ed man- hour i ndex .
5.
Fur t her ef f or t s shoul d be devot ed t o i mpr ov ement of qual i t y change
measur ement .
I f qual i t y change el udes measur ement ,
at
l east
t he
113
man- hour s devot ed t o i mpr ovement of ser vi ce shoul d be s egr e
gat ed f r om man- hour s devot ed t o oper at i ons.
6.
Coor di nat i on of needs f or mi l i t ar y pr i c i ng wi t h t hose f or .
pr oduc t i vi t y meas ur ement
shoul d be under t aken wi t h t he goal
of at t ai ni ng r econc i l i at i on ( i f not uni f or mi t y)
cept s,
7.
of dat a,
c on
and scope.
For pr oduc t i vi t y est i mat es f or suppl i er s,
es t i mat es shoul d
be consi der ed us i ng:
a.
The I ndust r y Pr oduc t i vi t y Pr ogr am of BLS.
b.
Def l at or s f r om BLS I ndust r i al
Sect or Pr i ce I ndex pr ogr am
of BLS or Census man- hour s.
c.
Feder al
Reser ve pr oduct i on i ndexes and appr opr i at e man
hour s.
d.
8.
Lear ni ng cur ves,
I n t he begi nni ng,
as appr opr i at e.
much of t he ef f or t
t o use pr oduc t i v i t y
dat a i n conj unct i on wi t h pr i ce dat a must be c onsi der ed ex
per i ment al
ear l i er .
and pr el i mi nar y , owi ng t o t he pr obl ems ment i oned
Thi s shoul d cal l
di sc our agement ,
I f t he i ni t i al
however ,
i n vi ew of t he encour agi ng st ar t
been made i n t he gover nment
9.
f or caut i on,
ef f or t
r at her t han
t hat
has
sect or .
t o cons t r uc t a pr i ce i ndex f or def l at i ng
mi l i t ar y pur chases i s t o be devot ed t o meas ur ement
of pr i ce
change of speci f i ed pr oduct s and ser vi ces,
unadj ust ed f or
change i n ef f ect i veness or end- us e i n DOD,
t he pr oduc t i vi t y
measur es ar e not needed.
Pr oduc t i vi t y measur es cover i ng
1 HP.P1 i er s 1 act i vi t i es woul d be usef ul
as es t i mat i ng devi ces
wher ev er mi l i t ar y pur chase pr i ces( suppl i er s'
ar e unavai l abl e.
sal es pr i ces)
I f one of t he al t er nat i v e pr i ce measur es
i s t o be const r uct ed,
however ,
wi t hi n DOD woul d be r equi r ed.
measur es of pr oduct i vi t y change
115
FOREI GN MI LI TARY PRI CE I NDEXES
V.
A.
I nt r oduct i on
Thi s sect i on descr i bes t he f or ei gn " st at e- of - t he- ar t "
mi l i t ar y expendi t ur es.
Unf or t unat el y,
of def l at i ng
document at i on of t he met hodol ogy
empl oyed i n t he devel opment of mi l i t ar y ex pendi t ur es i n cons t ant
i s not sy st emat i c al l y col l ect ed at one sour ce.
exi st ,
it
i s gener al l y unpubl i shed mat er i al .
Wher e document at i on does
Ther ef or e,
t act s over an ext ended per i od of t i me t hr ough l et t er s,
sat i ons and vi si t s wer e made t o col l ec t
pr i ces
numer ous c on
t el ephone c onv er
i nf or mat i on f or t he var i ous c oun
t r i es.
Accor di ng t o t he Uni t ed Nat i ons ( U. N. ) ,
onl y 14 count r i es suppl y
t hi s or gani zat i on wi t h i nf or mat i on on mi l i t ar y pur chases i n c ons t ant
pr i ces. ! ^
mar k et
Exhi bi t V- l
l i st s t hese count r i es and t hei r base y ear of
pr i ces.
I nf or mat i on on def l at i ng mi l i t ar y pur chases was not obt ai ned f or
al l
count r i es l i st ed.
but dat a
w ere
Net her l ands . ^
Gr eece and Zambi a ar e excl uded f r om our anal ysi s,
obt ai ned on Aust r al i a,
I n addi t i on,
sever al
I t al y,
Japan,
or gani zat i ons,
Luxembur g and t he
i ncl udi ng t he U. N. ,
Or gani zat i on f or Economi c Co- oper at i on and Devel opment
( OECD) ,
C. Wai t e, U. S. Depar t ment of Commer ce,
Uni t ed Nat i ons, 1 June 1972.
Nor t h
iy
Let t er t o Mr .
Th. Pedessen,
f r om Mr .
Hans
2/
”
I n a di pl omat i c not e dat ed Oc t ober 20, 1972, " . . . t he Compt r ol l er
Gener al of t he Republ i c of Panama has st at ed t hat nei t her t he Di r ec
t or at e of St at i st i cs and Census nor any ot her par t of hi s or gani z a
t i on pr epar es dat a on mi l i t ar y ex pendi t ur es of t he Gov er nment of
Panama, nor has he sent t hem ( i . e. , such dat a) on any oc casi on t o
t he Uni t ed Nat i ons Or gani zat i on. "
116
At l ant i c Tr eat y Or gani zat i on ( NATO) ,
and St oc khol m I nt er nat i onal
Peace
Resear ch I nst i t ut e ( SI PRI ) wer e most cooper at i v e and pr ovi ded usef ul
i nf or mat i on on sel ect ed count r i es.
Speci f i c det ai l
f i cul t
on def l at i on i n t he mi l i t ar y sect or i s most di f
t o obt ai n ( See Appendi x V- A f or a t abul at i on of
on pr act i ces i n var i ous count r i es. ) .
di scusses gener al
t he Uni t ed Nat i ons
The next sect i on of t hi s chapt er
met hods of def l at i on i n t he publ i c sect or as a whol e
f or t he f ol l owi ng count r i es:
Aust r al i a
Canada
Japan
Nor way
Sweden
Swi t zer l and
Uni t ed Ki ngdom
Speci f i c det ai l s on t he def l at i on of mi l i t ar y expendi t ur es f ol l ow f or
t hese count r i es:
Bel gi um
Canada
Denmar k
Feder al Republ i c
of Ger many
Fi nl and
B.
Gener al
Real
Met hods of Def l at i on i n t he Publ i c Sec t or - 2/
pr oduct
i s def i ned as val ue added measur ed at const ant
" Val ue added at const ant
pr i ces. —/
pr i ces can be der i ved as t he di f f er ence
bet ween gr oss out put and t ot al
~
Fr ance
I t al y
Net her l ands
Nor way
Sweden
Uni t ed Ki ngdom
i nt er medi at e i nput s,
each measur ed
n^ ' S s ®c i *i °n r oakes ext ens i v e use and r el i es heavi l y on mat er i al f r om
Ri echel , Kl aus W. , " Def l at i on i n t he Publ i c Sect or , " Dr af t PaDer
OECD, August 27, 1973.
M
4/ Hi l l ,
T.
P. ,
" The Meas ur ement of Real
Pr oduct , "
OECD,
Par i s,
Febr uar y
117
EXHI BI T V- l
DEFENSE EXPENDI TURES AT CONSTANT PRI CES
At Mar k et
Count r y
Pr i ce of
1.
Bel gi um
.......................
............
63
2.
Canada . . . . . . . . . . . . . . . . . . . . . . . . .
............
57
3.
Denmar k
.......................
............
55
4.
Fi nl and
.......................
............
55
............
59- 63
............
58
7.
Nor way . . . . . . . . . . . . . . . . . . . . . . . . .
............
63
8.
Panama . . . . . . . . . . . . . . . . . . . . . . . . .
............
60
9.
Phi l i ppi nes
..................
............
55
10.
Swi t zer l and
..................
............
58
11.
Sweden . . . . . . . . . . . . . . . . . . . . . . . . .
............
59
12.
Uni t ed Ki ngdom
..............
............
63
13.
Uni t ed St at es
................
............
63
14.
Zambi a . . . . . . . . . . . . . . . . . . . . . . . . .
............
54- 65
118
at const ant
pr i ces.
Thi s met hod,
out put s and i nput s at cons t ant
n at i on.
I
t
whi ch i nvol ves meas ur i ng bot h
pr i ces i s gener al l y known as doubl e de-
i s wel l - k nown t hat
meas ur i ng publ i c sect or out put ;
t hi s excl udes al most ent i r el y t he appl i
cat i on of t he conc ept ual l y opt i mal
sect or .
t her e ar e no cl ear cut met hods f or
met hod of doubl e def l at i on i n t hi s
I n vi ew of t hi s di f f i cul t y,
si st i ng of def l at i on of
Sweden empl oys a mi xed met hod con
i nt er medi at e cons umpt i on and def l at i on of
of t he i t ems t hat ar e nor mal l y i ncl uded i n val ue added,
of empl oyees and cons umpt i on of f i xed capi t al .
Aus t r al i a,
Japan,
Nor way,
e. g. ,
compensat i on
Ot her count r i es,
Swi t zer l and and t he Uni t ed Ki ngdom^ /
some
such as
di s t i n
gui sh separ at e def l at or s f or cur r ent expendi t ur es on goods and ser vi ces
and gr oss domest i c ( or gr oss f i xed)
component s.
capi t al
f or mat i on and t hei r var i ous
Canada si mpl y est abl i shes a def l at or f or a " wage cat egor y"
and a " nonwage c at egor y . 11
Dat a and i nf or mat i on f or al l
t ur es ar e not al ways avai l abl e.
component s of di saggr egat ed ex pendi
I n t hese cases def l at or s f or compar abl e
component s or r epr es ent at i ve i t ems wi t hi n t he component f or whi ch dat a
ar e avai l abl e may be used.
Aust r al i a uses t he met hod of
“ i mpl i ed pr i ce
i ndexes" whi ch compar es t o t he abov e met hod.
Tot al
publ i c sect or spendi ng at const ant
pr i ces can be r eached
ei t her by f i ndi ng separ at e def l at or s f or par t s of publ i c expendi t ur es
5/
6/
I bi d.
Ji r n, i ni ct i nc t i 0n T T i n f or t h? pub1i c sect or i n t he UK nat i onal
account s.
Separ at e def l at or s wi t h mor e det ai l ar e devel oped f or t he
2 .
Pf l l c Ex pendi t ur e Sur v ey ( see t ext bel ow) whi ch exi st s f or
f i nanci al year s onl y; t he pr i ce basi s i s changed ever y year .
119
and addi ng up t hei r " r eal "
def l at or f or t ot al
Count r i es t hat
Aust r al i a,
val ue or by appl i c at i on of a gener al
out l ays. - ^
The usual
( wei ght ed)
met hod uses a mi xt ur e of bot h.
t end t o emphas i z e mor e st r ongl y t he f or mer appr oach ar e
Nor way,
Sweden and t he Uni t ed Ki ngdom.
Swi t zer l and def l at es publ i c ex pendi t ur es by t he use of pr i ce i ndexes^,
cost
i ndexes,
and vol ume i ndex es .
cur r ent ex pendi t ur es and capi t al
not def l at ed.
A basi c di st i nct i on i s made bet ween
expendi t ur es.
Tr ansf er s i n ki nd ar e
Four cat egor i es ar e di st i ngui s hed wi t hi n cur r ent expend-
i t ur es:
•
•
•
•
Capi t al
educ at i on and r esear ch
publ i c heal t h
def ense
ot her
ex pendi t ur es ar e di vi ded i nt o cons t r uc t i on and mat er i al s.
subcat egor y i s def l at ed separ at el y and t hen added up t o t he t ot al
publ i c expendi t ur es i n cons t ant pr i ces.
st ant pr i ce dat a i s t he i mpl i ci t
i ndex.
i t ur e on goods and ser vi ces down f ur t her
7/
-
of
The r at i o of cur r ent over con
Aust r al i a br eaks one of t he t wo economi c c at egor i es,
•
•
•
•
•
•
Each
c ur r ent ex pend
i nt o t he f ol l owi ng f unc t i ons:
educ at i on
heal t h
.
^ . . .
dev el opment of r esour ces and as si st ance t o i ndust r y
t r anspor t and communi c at i on
power , f uel and l i ght
housi ng
The r eader i s r emi nded t hat t he use of a Laspeyr es pr i c e i ndex f or mul a t o cons t r uc t t he def l at or f ar t he t ot al out l ays r esul t s i n a
def l at ed val ue ser i es of t he
asche f or m.
The use of Laspey r es pr i ce
ser i es at det ai l ed l evel s ( whi ch ar e t hen aggr egat ed) pr ovi des an
appr oach t o t he Paasche pr i ce i ndex and Laspeyr es q uant i t y, i ndex at
t he t ot al l evel .
See Chapt er I I .
12 0
J he Aus t r al i an s t at i st i ci ans separ at e out l ays on compensat i on f or
empl oyees f r om ot her pur chases wi t hi n each f unct i on,
devel op a wei ght ed
wages and sal ar y i ndex and a wei ght ed pr i ce i ndex f or ot her pur c has es ,
der l yej . , c ompos i t e i ndex out of t he t wo and appl y i t t o t he cons umpt i on
ex pendi t ur es of t he f unc t i on.
pendi t ur es by f unc t i on.
dom i n i t s annual
A si mi l ar pr ocess i s used f or capi t al
A par al l el
The cons t ant
appr oach i s used by t he Uni t ed Ki na-
Publ i c Ex pendi t ur e Sur vey,
i l y wi t h t he pl anni ng and cont r ol
ex
whi c h i s concer ned pr i mar
of ex pendi t ur e f or t he next f i ve year s.
pr i ce basi s f or each f unct i on i s cal l ed " sur vey pr i ces. "
Sweden does not di s t i ngui s h b. y f unct i on but r at her by ki nd of out l ay s .
A det ai l ed di scus si on of t he comput at i on of t hese cat egor i es i s pr esent ed
i n t he next sect i on of t hi s chapt er .
Count r i es t hat t end t o emphasi ze a wei ght ed gener al
def l at or ar e
Canada and J apan.
Jaj gan empl oys a v er y det ai l ed and sophi st i cat ed wei ght i ng syst em
TQ. _P.bt ai n a " pr i ce def l at or of gener al
gover nment cons umpt i on ex pendi
t ur e" and a , " pr i ce def l at or of gr oss domest i c capi t al
ar e used t o def l at e t he t ot al
f or mat i on. " whi ch
of t he cor r es pondi ng expendi t ur es.
f or mer
i s t he wei ght ed synt hesi s of a " mat er i al
sonnel
expendi t ur e cost
i ndex. "
The " mat er i al
cost
cost
The
i ndex" and a " per
i ndex"
of t he mai n goods and ser vi ces pur chased by t he gover nment .
i s composed
The def l a
t or of each i t em i s cal cul at ed and wei ght ed by i t s i mpor t ance i n t ot al
mat er i al
cost ,
accor di ng t o a 1965 i nput - out put t abl e.
The pr i ce def l at or of gr oss domest i c capi t al
f or mat i on,
i n t ur n,
i s t he r esul t of t he wei ght ed synt hesi s of a " dwel l i ngs def l at or "
ken down i nt o wooden and non- wooden house pr i ce i ndex)
( br o
and an " ot her
12 1
st r uct ur es def l at or "
( br oken down i nt o a " machi ner y pr i ce i ndex" and a
" c onst r uct i on pr i ce i ndex ot her t han r esi dent i al
wei ght s of t he subgr oups and t hei r i ndi vi dual
bui l di ng ) .
The
component s i n t he over al l
def l at or ar e agai n der i ved f r om an i nput - out put
t abl e.
For a cl oser i nvest i gat i on of t he met hods and def l at or s used i n t he
count r i es under r evi ew,
wi l l
be made:
a separ at i on i nt o t he f ol l owi ng f our mai n gr oups
( 1) compensat i on of empl oyees,
on goods and ser vi ces,
( 3) gr oss f i xed capi t al
bui l di ngs and ot her const r uct i on)
and ( 4)
( 2) cur r ent ex pendi t ur es
f or mat i on ( ot her t han
bui l di ngs and ot her c ons t r uc
t i on.
Compensat i on of Empl oyees
1.
Ther e ar e t wo i mpor t ant met hods of ar r i vi ng at c ons t ant pr i ce
compensat i on of empl oyees:
measur e,
One,
a di r ect appr oach t o a wei ght ed quant i t y
uses empl oy ment dat a and avoi ds t he need f or a def l at or ;
ot her i nvol ves devel opi ng a wage and sal ar y " pr i ce
def l at or .
i ndex f or us e as a
Canada f avor s t he f or mer appr oach by usi ng a det ai l ed br eak
down based on t he compos i t i on of empl oyment .
ment
t he
The cur r ent year ' s empl oy
i n each cat egor y i s val ued at t he appr opr i at e base year aver age
sal ar y.
Sweden has r el i ed on t hi s appr oach si nce 1963;
used a wage i ndex.
t hey ser ve,
Now compensat i on of empl oyees,
i s ex t r apol at ed by empl oy ment
The base y ear i s
i ndexes ar e compi l ed f or var i ous degr ees.
mai n gr oup f or whi c h vol ume ( empl oyment )
f or ces.
cl assi f i ed by pur pose
The Uni t ed Ki ngdom empl oys mai nl y wage and sal ar y i ndexes,
i n some cases empl oy ment
it
i ndex number s whi c h ar e based
on hour s wor ked and ar e di f f er ent f or each pur pose.
1968.
bef or e t hat ,
t hough
The
i ndexes ar e used i s t he ar med
Aust r al i a adher es basi cal l y t o t he same syst em.
122
A speci al
i ndex"
met hod i s used by J apan.
The " per sonnel
ex pendi t ur e cost
i s der i ved f r om t he f ol l owi ng f or mul a:
I =
4
11
2
2
(P
x N
)
i =l
J=1
tji
tji
----------------------- 4
11
2
Z
(P
x N
)
j =l
tji
oj i
wher e:
Pt j i = per c aP1t a sal ar i es di vi ded by school
by wor k car eer s ( j =l ,
N. . . = Number of per sonnel
t J
. . . , 11)
. . . 4)
and
i n 1965
i n t - year
1
Thi s i ndex i s r eal l y a vol ume i ndex,
ment
car eer s ( i =l ,
but
i t cont ai ns some " qual i t y"
el e
t hr ough t he " car eer gr adi ng syst em. "
Whi c hever of t he t wo met hods ( cost or vol ume i ndexes)
pr i nci pl es ar e much t he same;
namel y,
" t he
t hat wi t hi n an empl oy ment cat egor y
t he av er age out put of empl oyees i s unchangi ng t hr ough t i me;
base year
i s used,
and i n t he
t he out put of empl oyees i n var i ous gr ades i s meas ur ed by t hei r
ear ni ngs . "
2.
Cur r ent Ex pendi t ur es on Goods and Ser vi ces
The appl i c at i on of pr i ce i ndexes based on t he pr i vat e ec on
omy i s t he domi nant way of def l at i ng cur r ent ex pendi t ur es on goods and
ser vi c es of gover nment s.
I n most count r i es,
t he br eakdown of t hese ex
pendi t ur es i nt o component s depends on t he av ai l abi l i t y of separ at e pr i ce
i ndexes.
When mor e i ndi vi dual
us ual l y di saggr egat ed.
def l at or s exi st ,
mor e expendi t ur es ar e
Aust r al i a makes use of " i mpl i ci t pr i ce i ndexes"
12 3
f or t hose gr oups of ex pendi t ur es f or whi c h no speci f i c pr i ce i ndex i s
avai l abl e.
Dependi ng upon t he component ,
dex or a consumer pr i ce i ndex i s used.
i es of cur r ent
ei t her a whol es al e pr i ce i n
Japan di st i ngui s hes 22 c at egor
ex pendi t ur es of goods and ser vi ces of whi ch 15 ar e de
f l at ed by an i ndex based on budget cal cul at i ons;
muni cat i on,
t r avel
cost ,
t el ec om
wat er and post age ar e def l at ed by a char ges i ndex.
and Canada seem t o r el y ex cl us i v el y on pr i ce def l at or s.
Japan
Ot her count r i es,
such as Aus t r al i a, Sweden, and t he Uni t ed Ki ngdom, whi l e f ocusi ng on de
f l at i on by WPI
and CPI ,
i n par t i cul ar ,
uses vol ume i ndi cat or s f or sel ect ed out l ays.
al so appl y ot her met hods.
The Uni t ed Ki ngdom,
A par t i c u
l ar pr obl em exi st s f or t hose goods and ser vi ces f or whi ch t he publ i c
sect or i s ei t her t he onl y or t he domi nant
quot ed mar k et
pr i ce exi st s,
not avai l abl e at any poi nt
buyer and,
or f or whi c h a cl ear - cut
i n t i me or over t i me.
hence,
no r egul ar l y
st andar di z at i on i s
I n t hese cases Aust r al i a
and t he Uni t ed Ki ngdom cons t r uc t a def l at or based on cost of l abor and
i nt er medi at e i nput s empl oyed i n t he pr oduc t i on of t he commodi t y or s er
vi ce bought .
3.
Gr oss Fi xed Capi t al
const r uct i on)
For mat i on ( except
bui l di ngs and ot her
For c ur r ent expendi t ur es on goods and ser vi ces t he number
and ki nd of def l at or s used f or def l at i ng gr oss f i xed capi t al
f or mat i on
of gover nment s i s det er mi ned l ar gel y by t he exi s t enc e of det ai l ed de
f l at or s f or pr i vat e sect or spendi ng.
def l at or s.
Thes e ar e most l y whol es al e pr i ce
They ar e set as much as possi bl e i n r el at i on t o t he asset
t o whi ch t hey cor r es pond di r ect l y or f or whi ch t hey ar e r epr esent at i ve.
The var i abl e nat ur e of pr oduct s i s a pr obl em f or t he deval uat i on of
124
capi t al
goods mor e t han f or cur r ent expendi t ur e.
The i dent i f i cat i on
and compar i s on i s al so made di f f i c ul t by r api dl y changi ng t echnol ogi es.
Ther ef or e,
i ndexes based on l abor and mat er i al
of t en used t o over come t hese di f f i cul t i es.
exampl e,
i nput
i n t he asset ar e
Thi s met hod i s empl oyed,
f or
by Aust r al i a and t he Uni t ed Ki ngdom.
4*
Bui l di ngs and Ot her Cons t r uct i on
The pr obl em of
i ncompar abi l i t y of f i nal
out put
i s par t i c ul ar l y
gr ave i n bui l di ngs and ot her const r uct i on.
Most uni t s ar e uni que and do
not l end t hemsel ves t o st andar di z at i on and,
t hus,
Ther ef or e,
var i ous combi nat i ons of cost
an i nput def l at or .
i nput
f or a
J apan, f or exampl e,
i ndexes ar e used t o ar r i ve at
di st i ngui s hes 23 cat egor i es of
wooden house pr i ce i ndex" and 26 cat egor i es f or t he " non-
wooden house pr i ce i ndex. "
l abor cost
i ndex"
f or each.
f ol l ows t he i nput - out put
These t wo i ndexes ar e t hen combi ned wi t h a
The wei ght i ng of t he cor r es pondi ng i ndexes
t abl e of
1965.
Basi cal l y t he same met hod i s
used f or const r uc t i on ot her t han dwel l i ngs.
The cat egor i es di st i ngui shed,
t hei r wei ght i ng and t he wei ght i ng of mat er i al
al l y di f f er .
t o cl assi f i cat i on.
ver sus l abor cost s,
nat ur
I n t he Uni t ed Ki ngdom, i ndexes ar e cons t r uct ed by c ombi n
i ng t hr ee i ndexes cover i ng bui l di ng mat er i al
pr i ces,
over head and pr of i t s f or pr i vat e sect or spendi ng.
i t ur es ar e anal yzed i n det ai l
by f unct i on.
l abor cost s and
I n Aus t r al i a, ex pend
The mai n t ypes of c ons t r uc
t i on ar e def i ned and t hei r cor r es pondi ng act ual
expendi t ur es ar e def l at ed
by t he r el evant whol es al e pr i ce def l at or s.
5*
Tr ansf er s,
Subsi di es,
I nt er est Payment s
The met hods of def l at i on di scussed so f ar r el at ed t o gov er n
ment s'
out l ays on goods and ser vi ces onl y and di d not
i ncl ude not i ons
125
of possi bl e def l at or s f or t r ansf er s,
subsi di es and i nt er est payment s.
The Uni t ed Ki ngdom at t r i but es i mpor t ance t o t hi s subj ect and has made
some ex pl or at or y est i mat es of t r ansf er s at const ant pr i ces.
Thei r gener al
phi l os ophy under l yi ng t hes e cal c ul at i ons i s t hat
def l at or chosen f or each i t em of ex pendi t ur e shoul d r ef l ec t
t he
t he change
i n t he pr i ce of t he goods and ser vi ces whi c h ar e bought by t he r eci pi ent
of t he t r ansf er .
C.
Speci f i c Met hods of Def l at i on i n t he Mi l i t ar y Sect or
1.
Bel gi um^ /
Publ i c sal ar i es i n Bel gi um ar e aut omat i cal l y adj ust ed f or
cost of l i vi ng i ncr eases.
cal cul at i ng r et ai l
Def l at i on of gover nment r emuner at i ons i nvol ves
pr i ce i ndex coef f i ci ent s t o adj ust sal ar i es when a
cost of l i vi ng i ncr ease occur s.
Tot al
r emuner at i ons ar e di vi ded i nt o t he
f ol l owi ng t hr ee cat egor i es:
a)
admi ni st r at i ve f unct i on
b)
educat i on
c)
ar med f or ces
Cat egor y ( a) and ( c) show an i ndex equal
wi t h a sl i ght l ag.
I n cat egor y ( b) ,
t o changes i n r et ai l
pr i ces
t he i ndex i s i ncr eased by f i ve per
cent .
Pur chases of goods and ser vi ces i n Bel gi um ar e di vi ded i nt o f i ve
cat egor i es and t he r el evant pr i ce i ndex i s used f or each ( whol esal e,
r et ai l
or f or ei gn pr i ce i ndexes) .
A t ype of Laspeyr es f or mul a i s used
wi t h wei ght i ng coef f i ci ent s f r om 1959 i nput - out put dat a.
8/
Ol i s l aeger s, 0. L. , Est i mat es at Cons t ant Pr i ces of t he Pr oduct i vi t y,
and Cons umpt i on of Publ i c Admi ni s t r at i ons , St at i st i cs Of f i ce, Eur o
pean Communi t i es, December 1968.
12 6
2 .
Can ad a
Canadi an meas ur ement of cons t ant dol l ar mi l i t ar y expendi t ur es
i s r el at i vel y si mpl e because of cont i nuous f or ce l evel
budget cont r ol s.
The mi l i t ar y pay and al l owanc e def l at or
i mpl i c i t l y by di vi di ng t he t ot al
f or ces.
sect or ,
r educt i on and
i s obt ai ned
ear ni ngs by t he st r engt h of t he ar med
Ci vi l i an sal ar i es and wages,
whi ch ar e par t of
t he def ense
ar e est i mat ed t hr ough an " ear ni ngs i ndex" ac cor di ng t o sal ar i es;
t hey ar e nonenumer at ed.
Def ense capi t al
expendi t ur es ar e est i mat ed
t hr ough a combi ned pr i ce i ndex whi ch i ncl udes U. S.
machi ner y i n Canada,
Canadi an machi ner y and equi pment and r out i ne expenses.
Resi dual
def ense
expendi t ur es ar e def l at ed by a combi nat i on of t he aver age Whol esal e Pr i ce
I ndexes f or f i ber s and t ext i l es,
met al s,
wood pr oduct s,
nonmet al l i c mi ner al s and chemi cal s,
hour l y ear ni ngs i n manuf act ur i ng,
i r on and nonf er r ous
on t he one hand,
on t he ot her .
Mor e r ecent l y t he Di r ect or at e of Cost i ng Ser vi ces,
f ence Headquar t er s,
has devel oped an economi c model
chases.
makes
Thi s model
depar t ment al
i ndexes,
pr i ce r ecor ds,
use of
and aver age
Nat i onal
f or mi l i t ar y pur
( i n desc endi ng or der of
r egul at i on change cost i ngs,
combi nat i ons of t he pr ecedi ng,
De
pr ef er ence)
nat i onal
pr i ce
and mi scel l aneous speci f i c
measur es.
The ef f or t i s made t o devel op ser i es based on mi l i t ar y pur 97
chases wher ev er f easi bl e. -
9/ Domi ni on of Canada, Nat i onal Def ence Headquar t er s, Di r ect or at e of
Cost i ng Ser vi ces, " Canadi an For ces Economi c Model , " May 1975; and
" Canadi an For ces I nf l at i on Model , " NATO ED/ EC/ 74/ 31, May 1974.
127
3.
Denmar k
10 /
Dani sh r epor t s on nat i onal
cl ude def l at ed f i gur es,
bot h of t ot al
t ur es and t he ci vi l i an sect or
expendi t ur es ) ,
account s t o t he Uni t ed Nat i ons i n
gover nment cons umpt i on ex pendi
( and so i mpl i ci t l y al so of t he mi l i t ar y
but t he met hod of def l at i on i s r el at i vel y si mpl e.
The
ci vi l i an expendi t ur es ar e def l at ed by t he same i ndex as has been used
f or t ot al
gover nment consumpt i on.
The def l at i on of t ot al
gover nment cons umpt i on ex pendi t ur es uses
wage i ndexes and pr i ce i ndexes f or gr oups of goods and ser vi ces pur
chased by gover nment .
The l at t er does not
i ncl ude pr i ces f or mi l i t ar y
equi pment .
4.
Feder al
11/
Republ i c of Ger many—
The Feder al
Republ i c of Ger many publ i shes gover nment c ons ump
t i on expendi t ur es at cons t ant pr i ces on an aggr egat e basi s.
The c on
sumpt i on expendi t ur es f or mi l i t ar y pur poses consi st s of def ens e ser vi ces
pr oduced by gener al
gover nment mi nus t he sal es of ser vi ces.
pr oduced ser vi ces have no mar k et val ue,
pr act i ce)
t hey ar e ( f ol l owi ng i nt er nat i onal
val ued at t hei r cost s by subt r act i ng t he r evenue f r om sal es
i n or der t o obt ai n gover nment cons umpt i on expendi t ur es.
si st
Si nce t hese
of t he i ncome of t he mi l i t ar y per sonnel
i ncl udi ng r at i ons,
i nt er nat i onal
et c. ) .
( sal ar i es,
The cost s c on
sol di er s'
pay,
I t al so i ncl udes pur chases of goods whi c h by
agr eement al so i ncl ude dur abl e goods f or def ens e pur poses,
10/
Let t er t o Mr . Char l es A. Wai t e, U. S. Depar t ment of Commer ce,
Mr . Leo Meyer , Danmar ks St at i st i ck, 27 Jul y, 1972.
1y
Let t er t o Mr . Char l es A. Wai t e, U. S. Depar t ment of Commer ce, f r om
Dr . Hi l degar d Bar t el s , St at i st i sches Bundesant , 4 August , 1972.
f r om
128
such as equi pment ,
bar r acks,
et c.
Fi r st of al l ,
t he sal es compr i se
r at i ons t o t he amount of t he ex pendi t ur e f or r at i ons cont ai ned i n t he
i ncomes.
The above expens es / r ec ei pt s ar e def l at ed by means of di f f er
i ng i ndexes.
For sal ar i es,
et c. ,
and sol di er s'
pay,
Ger many uses i ndexes
ac count i ng f or i mpr ovement s or changes pr escr i bed by l aw or col l ec t i ve
l abor agr eement s.
nomi nal
Thes e may consi st ,
among ot her s,
bonuses or changes i n sol di er s'
pay r at es.
of per c ent age r ai ses,
The same appl i es t o
t he i ndex of r at i ons whi ch i s comput ed accor di ng t o t he changes of t he
r at i ons.
As t he sal es cons i s t al most ex cl us i v el y of sal es of r at i ons,
t he l at t er i ndex i s al so used t o def l at e t he sal es.
goods ar e def l at ed separ at el y accor di ng t o bui l di ngs,
i n t he count r y,
The pur chases of
equi pment
equi pment f r om abr oad and ot her pur chases.
pr oduced
Si nce t her e
ar e no speci f i c pr i ce i ndexes f or t he pur chases of t he gener al
gov er n
ment ,
Any i nt er
onl y r ough est i mat es ar e used i n par t f or t hi s pur pose.
est pai d f r om t he def ens e budget ,
t r ansf er s ef f ect ed and l oans ar e not
def l at ed.
5.
Fi nl and- ^
Fi nl and spl i t s publ i c expendi t ur e i nt o cons umpt i on and c api
t al
f or mat i ons.
Cons t ant pr i ce dat a ar e est i mat ed f or t hese t wo cat e
gor i es by wei ght i ng t he i ndexes of t hei r var i ous component s.
f l at or s ar e used f or ,
among ot her f unct i onal
cat egor i es,
Thes e de
def ense.
A
wage and sal ar y i ndex i s est i mat ed spec i f i c al l y f or t he def ens e sect or .
12_/
Let t er t o Mr . Char l es A.
Aar r e Sahavi r t a, Cent r al
Wai t e, U. S.
St at i st i cal
Depar t ment of Commer ce, f r om
Of f i ce of Fi nl and, 9 November ,
1972.
129
Benef i t s i n ki nd t o conscr i pt s of t he ar med f or ces ar e def l at ed by a
mi xt ur e of a subi ndex of t he cost - of - l i vi ng i ndex and some speci al
dexes r ef er r i ng t o cost s i ncur r ed by conscr i pt s.
i n
Def l at i on met hods f or
ot her t han sal ar y and wages i s gener al l y based on t he appl i c abl e whol e
sal e pr i ce i ndex and cost - of - l i vi ng i ndex.
6.
Fr ance- 1- ^
Publ i c sal ar y def l at i on i n Fr ance i s accompl i shed by c ompar
i ng aggr egat e sal ar i es i n t he base y ear t o t hose i n t he year
i n quest i on.
The di f f er ence i n t he t wo aggr egat e f i gur es i s br oken down i nt o f our
aspect s:
1)
The change i n t he number of empl oyees
2)
Changes i n gener al
3)
Changes i n wages of speci f i c cat egor i es of per sonnel
4)
Changes due t o al l
wage l evel s
ot her var i at i ons ( i . e. , pr omot i ons and de
mot i ons)
The di f f er ence,
y ear pr i ces,
t hen,
l eads t o a quant i t y i ndex whi ch,
appl i ed t o base
det er mi nes t he aggr egat e sal ar i es f i gur e f or t he year
in
quest i on.
Pur chases of goods and ser vi ces ar e def l at ed usi ng t he r el evant
pr i ce i ndex.
Pr oduct i on pr i ce i ndexes,
whol es al e pr i ce i ndexes or i n
dexes of f or ei gn t r ansact i ons may be used.
13/
Ol i s l aeger s, 0. I . , Es t i mat es at Cons t ant Pr i ces of t he Pr oduct i on
and Cons umpt i on of Publ i c Admi ni s t r at i ons , St at i st i cs Of f i ce, Eur opean Communi t i es, December 1968.
130
7.
I t al y^
Def l at i on of publ i c sal ar i es i n I t al y i s car r i ed out on an
over al l
basi s and i ncl udes r emuner at i ons f or soci al
pr ovi si ons.
i ndex f or sal ar i es i s ac t ual l y t he aver age of t wo i ndexes:
sal ar i es f or cent r al
per sonnel
gover nment
per sonnel
i n publ i c admi ni st r at i on.
and an i ndex of
The f i r s t
f or mul a deal i ng wi t h uni t r emuner at i ons,
The
an i ndex of
sal ar i es f or
i ndex empl oys a Laspeyr es
and t he second i ndex deal s si m
i l ar l y wi t h per capi t a r emuner at i on.
Pur chases i n I t al y ar e di vi ded i nt o ci vi l i an and def ens e pur chases
and t r eat ed separ at el y.
cat egor i es of pr oduct s,
Mi l i t ar y pur chases ar e def l at ed usi ng t hi r t y
some of whi c h ar e al so consi der ed gover nment
i nvest ment .
8.
Net her l ands— ^
The cons t ant - pr i ce meas ur es f or sal ar i es i n t he Net her l ands
ar e der i ved by appl yi ng an i ndex of quant i t y r ef l ect i ng i ncr eases i n t he
number of peopl e empl oyed t o r emuner at i ons i n t he base year .
t ot al
r emuner at i on nor t ot al
cat egor i es.
empl oyed per sonnel
ar e di saggr egat ed i nt o
Pur chases ar e def l at ed usi ng t he Whol es al e Pr i ce I ndex
wi t hout any br eakdown by agency or t ype of pur chase.
14/
I bi d.
15/
I bi d.
Nei t her
131
9.
Nor way —
I n Nor way t he est i mat es of t he nat i onal
account s i n r eal
t er ms
ar e der i ved wi t hi n t he f r amewor k of a det ai l ed i nt er i ndust r y t r ansact i ons
t abl e.
The syst em i s based on a det ai l ed commodi t y speci f i cat i on wher e
t he commodi t i es ar e gr ouped accor di ng t o an aggr egat e of t he Br ussel s
Tar i f f Nomencl at ur e.
The pr oduc t i on account
i t ar y expendi t ur e bot h at cur r ent
The est i mat es at const ant
pendi t ur e by pr i ce i ndexes.
f l at ed by i ndi vi dual
f or def ense shows t he mi l
and cons t ant
pr i ces.
pr i ces ar e obt ai ned by def l at i ng t he ex
The pur chases of goods and ser vi ces ar e de
pr i ce i ndexes f or each of t he commodi t i es used,
and
t he wages and sal ar i es pai d ar e def l at ed by a wage r at e i ndex.
Tot al
out put of mi l i t ar y ex pendi t ur e i n cons t ant pr i ces i s
cal cul at ed f r om t he c ost si de f or val ue added component s and i nt er medi at e
consumpt i on.
Compensat i on of empl oyees and consumpt i on of f i xed capi t al
f al l s wi t hi n t he val ue- added cat egor y.
I n t he per i od 1950- 1962,
c ompen
sat i on of empl oyees i s def l at ed by a wage i ndex whi ch i ncl udes " wagedr i f t "
f or t he cent r al
gover nment
pensat i on of empl oyees,
empl oy ment
sect or .
Fr om 1963 and af t er war ds,
usi ng 1968 as t he base year ,
t he c om
i s ex t r apol at ed by
i ndex number s whi ch ar e based on hour s wor ked.
16/ Let t er t o Mr . Char l es A. Wai t e,
Mr . Pet t er Jabob Bj eve, Cent r al
9 November , 1972.
U. S. Depar t ment of Commer ce, f r om
Bur eau of St at i st i cs of Nor way,
17/ Let t er t o Mr . Char l es A. Wai t e, U. S. Depar t ment of Commer ce, f r om
Mr . Er i k Lunden, Nat i onal Cent r al Bur eau of St at i st i cs, Sweden,
31 Oct ober , 1972.
132
Cons umpt i on of f i xed capi t al
has been cal cul at ed i n f i xed pr i ces as
t he di f f er enc e bet ween gr oss capi t al
f or mat i on and change i n capi t al
st ocks af t er depr ec i at i on al l owanc es dur i ng t he year .
af t er di spos i t i on f or cons umpt i on of f i xed capi t al
t he di f f er ent
The st ock val ues
have been val ued f or
t ypes of asset s wi t h t he r at i o bet ween expect ed r esi dual
l i f et i me and t ot al
expect ed l i f et i me.
Component s of i nt er medi at e cons umpt i on and met hods f or est i mat i ng
mi l i t ar y ex pendi t ur e i n cons t ant
•
•
A f act or - pr i ce i ndex f or cons t r uc t i on dev el
Cons t r uc t i on:
oped by t he Nat i onal
pr i ces ar e:
Boar d of Bui l di ng.
Machi ner y and equi pment :
A pr i c e i ndex wi t h f i xed wei ght s,
cons i s t i ng of Whol es al e Pr i ce I ndex f or shi ps,
mac hi ner y f or i ndust r i al
t r ucks,
and pr i ce i ndex f or
use excl udi ng t he val ue added t ax;
i ncl udi ng val ue added t ax;
t he WPI
f or
and t he Consumer Pr i ce I ndex f or pas
senger car s.
est at e,
•
Fuel :
The WPI
•
Rent :
An i ndex f or cal cul at ed cost s,
car et aki ng,
f or f uel .
char ges f or wat er ,
such as t ax on r eal
dr ai nage and gar bage col l ect i on,
and r epai r and mai nt enance.
•
Mai l :
•
Tr ans por t at i on:
•
Ot her goods :
added t ax.
The CPI
f or post age.
The CPI
The WPI
f or r ai l way f ar es.
f or pr i nt ed mat t er i ncl udi ng val ue
133
•
Ot her s er v i c es :
I mpl i ci t pr i ce i ndex of a dummy ac count f or
unspec i f i ed ser vi ces f or t he year s 1950- 1966.
dex has been ext r apol at ed by t he CPI ;
Fr om 1967 and on, t he i n
t he t ot al
i ndex f or ser vi ces.
Expendi t ur es f or t he r epai r and mai nt enanc e of t he f ol l owi ng i t ems
ar e def l at ed accor di ng t o t he i ndexes not ed:
•
Shi ps :
The WPI
•
Aut omobi l es :
f or shi pbui l di ng.
A wei ght ed pr i ce i ndex,
f or aut omobi l e r epai r and t he CPI
•
Ot her mac hi ner y :
pr oduc t s and machi ner y,
•
Bui l di ngs :
t he Nat i onal
11.
f or aut omobi l e spar e par t s.
A pr i ce i ndex whi ch i s an unwei ght ed av er
age of a wage i ndex f or i ndust r i al
met al
cons i s t i ng of t he CPI
A cost
wor ker s i n manuf act ur i ng of f abr i cat ed
and a pr i ce i ndex of
home pr oduced machi ner y.
i ndex f or r epai r of bui l di ngs devel oped by
Boar d of Bui l di ng.
Uni t ed Ki ngdom
The Cent r al
St at i st i cal
Of f i ce ( CSO)
of t he Gover nment of t he
Uni t ed Ki ngdom r eval ues c ur r ent mi l i t ar y def ense expendi t ur es ac cor di ng
t o el even mai n component s.
An over al l
i ndex of mi l i t ar y def ens e expend
i t ur e i s obt ai ned by wei ght i ng t he component
cur r ent expendi t ur e.
i t ur es.
I n gener al ,
Thi s over al l
i ndexes by t he appr opr i at e
i ndex i s used t o r eval ue t ot al
t he met hods of r eval uat i on as sume t her e i s no i n
cr ease i n pr oduc t i vi t y i n t he publ i c ser vi ce.
Exhi bi t V- 2 shows t he
br eakdown of def ens e component s and t he met hod of r eval uat i on.
be seen t hat
ex pend
I t wi l l
t he pr i ce i ndex used t o def l at e ex pendi t ur es f or goods of t en
r el at es t o cost s r at her t han t o t he pr i ce of t he pr oduct
var i abl e nat ur e of t he goods.
because of t he
13 4
EXHI BI T V- 2
METHODS FOR REVALUI NG CURRENT MI LI TARY EXPENDI TURES AT
CONSTANT PRI CES I N THE UNI TED KI NGDOM
Component
For ces'
Ci vi l i
i ncl
st af
i ng
pay
an wages and sal ar i es,
udi ng l ocal l y engaged
f over seas but ex c l ud
payment s of pensi ons
Met hod
Vol ume i ndi cat or :
of ar med f or ces
i ndex of
st r engt h
Def l at i on by base- wei ght ed i ndex of
wage and sal ar y r at es
Super annuat i on ( payment s of
pensi ons)
Vol ume i ndi cat or :
t he i ndex of ci vi l
i an st r engt h i mpl i ed by est i mat es of
def l at ed ex pendi t ur e on t he pr ec ed
i ng i t em
Resear ch and devel opment ( ex
cl udi ng wages and sal ar i es of
gover nment empl oyees)
Def l at i on by pr i ce i ndex f or i nput
cost s of r esear ch and devel opment
Ai r c r af t
Def l at i on by pr i ce i ndex based on i n
put cost s f or ai r c r af t
Shi pbui l di ng ( excl udi ng wages
and sal ar i es of gover nment
empl oyees)
Def l at i on by pr i ce i ndex f or shi ps
Ot her maj or equi pment and muni
t i ons
Def l at i on by pr i ce i ndexes mai nl y based
on i nput cost s f or ai r cr af t
Const r uc t i on
Def l at i on by pr i ce i ndex f or cost s of
new cons t r uc t i on ot her t han dwel l i ngs
Pet r ol eum pr oduct s
Def l at i on by i ndex f or wor l d pet r ol eum
pr i ces
Tr anspor t
Def l at i on by appr opr i at e sect i on of
t he r et ai l pr i ce i ndex
Mai nt enanc e and r epai r of bui l d
i ngs
Def l at i on by appr opr i at e sect i on of t he
r et ai l pr i ce i ndex
Ot her expendi t ur e
Def l at i on by pr i ce i ndex i mpl i ed f or
al l cat egor i es above, ot her t han
wages and sal ar i es
135
The Of f i ce of t he Mi ni st r y of Def ense ( MOD) al so est i mat es def ens e
expendi t ur es.
A di s c r epanc y exi st s bet ween t he CSO i ndex f or mi l i t ar y
expendi t ur es and t he pr i ce i ndex f or t he def ens e budget cons t r uc t ed by
MOD.
Thi s l ay not
i n di f f er ences of cover age or cons t r uc t i on nor i n t he
ac c ur acy of t he i ndi vi dual
def l at or s used wi t hi n t he over al l
but i n t he r equi r ement t hat
er t i es.
f i nanci al
t he t wo i ndexes have cont i nuous t i mi ng pr op
The MOD i ndex i s not
year
r eval uat i on,
compar abl e t o t he CSO i ndex,
i t pr ovi des an est i mat e of
si nce f or any
pr i ce movement based on pr i ce
mov ement der i ved f r om a t i me per i od pr i or t o t he est i mat ed f i nanci al
year .
12.
Nor t h At l ant i c Tr eat y Or gani zat i on
Cur r ent l y,
NATO ( t hr ough i t s Economi c Commi t t ee)
i s devot i ng
i ncr eased emphasi s on st andar di z i ng t he sel ect i on of dat a and met hods of
const r uc t i on empl oyed by member count r i es wi t h r espect t o t hei r r epor t s
t o NATO on pr i ce change and r eal
agr eed t hat di r ect
Whi l e i t i s
pr i ci ng of mi l i t ar y pur chases woul d be desi r abl e,
t hi s may be beyond pr esent
wi t hi n r each,
mi l i t ar y expendi t ur es.
i t i s f el t ,
possi bi l i t i es.
Mor e modest
i mpr ovement s ar e
even t hough pr oxy pr i ce measur es dr awn f r om
t he ci vi l i an economi es cont i nue t o be used,
es peci al l y f or nonper sonnel
out l ays.
As a f i r s t st ep,
and nonper sonnel .
al l
t wo maj or def l at or s woul d be i dent i f i ed— per sonnel
The def l at or f or per sonnel
woul d be cons t r uct ed f or
member count r i es f r om r eadi l y av ai l abl e dat a on aver age r at es of pay
f or of f i cer s,
per sonnel
enl i st ed men,
and def ense ci vi l i an empl oyees.
A non
def l at or coul d be const r uct ed f r om pr i ce i ndexes used as
136
def l at or s f or gr oss domest i c pr oduct ,
sonnel
gover nment
expendi t ur es.
pr i ces coul d be used.
or publ i c consumpt i on,
I f necessar y,
or nonper
an i ndex of i ndust r i al
Looki ng t owar d t he f ut ur e,
cons i der at i on i s bei ng
di r ect ed t owar d a si x- def l at or sy st em as a second st ep and a 27- def l at or
sy st em as a t hi r d st ep.
The si x- def l at or syst em woul d cover per sonnel ,
pur chases f r om i ndust r y,
mi l i t ar y const r uct i on,
ot her def ense expendi t ur es,
f or ei gn count r i es.
at pr esent
and pur chase of goods and ser vi ces f r om
Each of t hese br oad cl asses of pr oduct woul d be
def i ned as a gr oup of
codi ng st r uct ur e.
" NATO cat egor i es" ac cor di ng t o t he exi st i ng NATO
Qual i t y- change adj ust ment s ar e seen not t o be f easi bl e
but r esear ch t owar d t hi s end i s encour aged.
have been comput ed f or Bel gi um,
13.
pet r ol eum pr oduct s,
I t al y,
Nor way,
Test
i ndexes
and t he Uni t ed Ki ngdom.
Uni t ed Nat i on s ^ /
The St at i st i cal
Commi ssi on of t he Uni t ed Nat i ons i s devel opi ng
pr oposal s f or an i nt egr at ed syst em of pr i ce and quant i t y i ndexes.
pr oposal s consi st of gui del i nes t o assi st
devel op t hei r nat i onal
t o pr omot e i nt er nat i onal
nat i onal
compar abi l i t y.
Account s ( SNA)
cent r al l y pl anned economi es.
no si gni f i c ant
use t he
be appl i c abl e t o t he Syst em
Economy ( MPS)
i n nat i ons wi t h
I n t he publ i c admi ni st r at i on sect or s,
changes i n met hods ar e f or eseen,
i mpr ov ement may come as a r esul t of
W
The common f r amewor k wi l l
i n count r i es wi t h " mar ket " economi es and t o
t he Sy st em of Bal ances of t he Nat i onal
however ,
t he var i ous count r i es t o
pr i ce and quant i t y st at i st i cs i n such a way as
account s as a f r amewor k and wi l l
of Nat i onal
The
t he i nt r oduct i on,
al t hough
i n a number of
Uni t ed Nat i ons Secr et ar i at , " Syst em of Quant i t y and Pr i ce St a
t i st i cs, " ST/ ESA/ STAT. 73, Febr uar y 1975.
137
count r i es,
of t he Pl anni ng,
Pr ogr ammi ng and Budget i ng Sy st em ( PPBS)
i n connect i on wi t h ef f or t s t o quant i f y many t asks of admi ni st r at i ve
uni t s.
138
VI .
A.
UNI TED STATES MI LI TARY PRI CE I NDEXES
I nt r oduct i on
I f one wer e asked t o char act er i ze i n a si ngl e wor d t he gener al
st at us
of def l at or s and t he der i vat i ve cons t ant - dol l ar est i mat es pr esent l y
av ai l abl e f or gover nment expendi t ur es ( ci vi l i an and mi l i t ar y ) ,
mi ght wel l
be " depl or abl e" .
The ar gument
f or t h i n t he concl usi ons of
sect i ons.
I n gener al
f or t hi s as sess ment
t he wor d
i s set
t hi s r epor t and t he det ai l s i n appr opr i at e
t er ms,
t he under l yi ng pr obl em common t o i ndexes
used t o def l at e mi l i t ar y pur chases i s t hei r hi gh degr ee of r el i ance on
pr i ce dat a col l ect ed t o meas ur e t r ends i n t he pr i vat e economy.
t hi s,
Added t o
some measur es i ncor por at e ver y br oad pr oduct gr oupi ngs so t hat
t he r esul t ant
i ndexes ar e not o'
sensi t i ve as t hey mi ght
have been,
if
gr eat er sel ect i vi t y had been shown.
At
l evel s of det ai l
ar e measur es — st i l l
f i ner t han t ot al
pr i ce dat a,
coupl ed wi t h a hi gh degr ee of
i n devel opi ng t he wei ght i ng st r uct ur e f r om DOD sour ces.
pr oduct
cl ass l evel ,
f ew pr oduct s ( al bei t
Some of t he most
ar e descr i bed bel ow,
t her e
dependent on pr oxy i ndexes — whi ch show car ef ul
sel ect i v i t y i n choi ce of i nput
ski l l
def ense ex pendi t ur es,
al so,
t her e ar e i ndexes,
At
t he
based on DOD pr i ces f or a
i mpor t ant ones) .
i mpor t ant of
as wel l
t he cur r ent l y used br oad def l at or s
as some det ai l ed pr i ce measur es.
Some ad
hoc_ measur es ar e al so ci t ed because of t hei r t hought - pr ovoki ng
cont r i but i ons,
speci al
even t hough t hey ar e not
cur r ent l y mai nt ai ned.
st udi es on pr i ce i ndexes ar e di scussed.
a l i st i ng and descr i pt i ons of
r el at ed wor k.
Fi nal l y,
Appendi x VI - A pr esent s
139
B.
Bur eau of Economi c Anal ysi s*
The BEA of t he U. S.
Def ense Def l at or
Depar t ment of Commer ce pr epar es a def l at or
in
t he pr ocess of cons t r uct i ng cons t ant - dol l ar ser i es f or t he gover nment
sect or of t he Nat i onal
Ac c ount s „
As f or ot her sect or s of t he economy,
t he BEA def l at es segment s of t he account s separ at el y at t he most
l evel
det ai l ed
f easi bl e and accumul at es t he cons t ant - dol l ar f i gur e t o obt ai n
t ot al s at var i ous hi gher l evel s.
i s der i vat i ve,
i mpl i ci t ,
accumul at ed l evel s.
usef ul
Thus,
t he def l at or at hi gher l evel s
r at her t han an i nst r ument of def l at i on of t he
However ,
once def l at or s ar e der i ved,
t hey ar e
i n a var i et y of ways i n def l at i ng r el at ed val ue ser i es.
The BEA i mpl i ci t
def l at or s f or t he Gover nment
sect or ar e used by
t he Of f i ce of Management and Budget and by t he Depar t ment
( Compt r ol l er )
t o def l at e def ense ex pendi t ur es,
t hese i ndexes have l i mi t at i ons.
Gover nment
of Def ense
as descr i bed bel ow.
pur chases ar e,
But
i n t he mai n,
def l at ed by i ndexes cons t r uc t ed wi t h pr i ce dat a f r om t he pr i vat e sect or .
Because t hese pr i ce i ndexes ar e not speci f i c al l y desi gned f or t he i t ems
t hey ar e used t o def l at e,
bought
t hey of t en ar e unsat i sf act or y»
by gover nment have no count er par t
mi ss i l es ,
desi gned.
t anks,
and space vehi cl es.
Thi s i s,
of cour se,
i n def ense def l at or s,
concept s,
i n t he pr i vat e sect or ,
i »e. ,
Such i t ems ar e of t en cust om
t he nr i me r eason t o seek i mpr ovement
despi t e t he ot her wi se car ef ul
devel opment
of
wei ght s and st r uct ur es of t he pr ox y- based def l at or s»
Recent l y t he BEA has i sol at ed t he def ense component
gener al
Many i t ems
gover nment
sect or i ndex»
i n t hat t he scope of t he i ndex,
f r om i t s
Thi s i ndex r epr esent s an i mpr ovement
sel ect i on of det ai l ed pr i ce ser i es and
140
wei ght i ng st r uct ur e ar e t ai l or ed t o def ense pur chases.
concer n r emai ns,
Exhi bi t
The maj or
however - - use of pr oxy i ndex component s.
VI - 1 shows t he 1972 i ndexes ( 1958 = 100)
and t hei r
component s f or t hi s appr oach i n compar i son wi t h BEA' s al l - Feder al Gov er nment i ndexes.
A det ai l ed desc r i pt i on of t he BEA def ense def l at or
i s pr esent ed i n Appendi x VI - B.
As an i nt er i m measur e i t mi ght wel l
r epl ace t he cur r ent l y used def l at or f or t he nonper sonnel
aspect s of
mi l i t ar y expendi t ur es.
C. .
Depar t ment of
Def ense' s I ndex
The i ndex pr epar ed and mai nt ai ned by t he Of f i ce of t he As si st ant
Secr et ar y of Def ense ( Compt r ol l er )
sonnel
i
makes use of DOD i nf or mat i on on per -
and on secondar y sour ces f or ot her pr i ce ser i es.
i s a wei ght ed i ndex of change of basi c r at es.
ances ar e changed by l egi sl at i on,
Mi l i t ar y pay
pay and al l ow
and separ at e i ndexes ar e comput ed.
Ret i r ed pay i s def l at ed by a " cost - per - man"
Lubr i cant s ( POL)
Speci al
1/
i ndex.
Pet r ol eum,
Oi l
ar e def l at ed by t he HP I f or mi ddl e di st i l l at es.
and
The
Mi l i t ar y Const r uct i on pr i ce i ndex of t he Commer ce Depar t ment i s descr i bed
above and di scussed i n Chapt er VI I ,
" Al l
ot her pur chases"
t he r emoval
of
Sect i on I , Mi l i t ar y Const r uct i on.
i s der i ved as a r esi dual
ser i es,
r esul t i ng f r om
t he POL i ndex f r om t he BEA def l at or f or Feder al
Pur chases
of Goods and Ser vi ces ( excl udi ng t he Commodi t y Cr edi t Cor por at i on) . Thus,
t he BEA i s an i ndex f or t he " cont r ol
T/
t ot al " ,
ot her t han per sonnel .
Shown i n t he " Economi cs of Def ense Spendi ng— A Look at t he Real
i t i es OASD ( compt r ol l er ) , Jul y 1972 and descr i bed i n " St at i nq
DOD Budget and FYDP i n Const ant Pr i ces" , unpubl i s hed not e.
14 1
EXHI BI T VI
- 1 DEFLATORS FOR FEDERAL PURCHASES,
( 1950 = 100)
1572
To ta l
De fe n se
Fe d .
o n l y
1 7 1 .7
16 9 .6
-------------------------------------------------------------------
2 3 0 .5
2 2 9 .9
------------------------------------------------------------------------
2 3 1.2
2 3 1.2
C i v i l i a n ------------ -- ---------------------------------------------------------
2 2 9 .9
2 2 7 .7
To t a l
---------------------------------------------------------------------------------------
Co m p e n s a t i o n
M i l i t a r y
Str u c tu r e s
Ne w
------------------------------------------------------------------------
19 8 .4
18 6 .0
18 7 .1
18 7 .1
18 7 .1
18 7 .1
---------------------------------------------------------------
18 2 .8
18 2 .8
-------------------------------------------------------------
18 7 .2
18 7 .2
---------------------------------------------------------- ---------
16 2 .2
c o n s tr u c ti o n
M i l i t a r y
Re s i d e n ti a l
Hi g h w a ys
2 18 .6
---------------------
2 0 0 .4
p u b l i c ----------------------- -- ------------------------
2 18 .6
and
o t h e r
Fo r c e
Pl u s :
Pu r c h a s e s
a c c o u n t
o f
b u i l d i n g
com pensation
e x i s t i n g
—
—
---- --
-----------------
s t r u c tu r e s
15 5 .3
—
15 5 .3
. . .
13 5 .4
-------------------------------------------------
13 4 .4
13 4 .4
------------------------------------------------------------------
12 4 .4
12 4 .4
-------------------------------------------------------------------------------
1 1 4 .7
11 4 .7
13 5 .9
13 5 .9
15 0 .6
15 0 .6
purc hases
M i l i t a r y
equ ipm en t
Am m u n i t i o n
Pu r c h a s e s
from
S t o c k p i l i n g
Co m m o d i t y
Fo r e i g n
abroad
and
------------------------------------------
d efen se
C r e d i t
p r o d u c tio n
Co r p o r a tio n
- ...................
purc hases
12 5 .8
i n t e r e s t -----------------------------------------------------
13 5 .2
eq uipm ent
...........................
12 6 .4
O t h e r -----------------------------------------------------------------------------
13 7 .4
Le s s :
Sa le s
Tr a ve l
and
o f
m i l i t a r y
t r a n s p o r t a t i o n
Tr a n s p o r t a t i o n
Re n t ,
o f
o f
persons
17 0 .0
- - -
--------------------------------
th in g s
—
—
12 6 .4
—
17 0 .0
10 8 .6
10 8 .6
----------
12 6 .2
12 6 .2
- ---------------------------
12 1.8
12 1.8
s e r v i c e s -----------------------------------------------------
16 5 .9
16 5 .9
------------------------------------
119 .2
11 9 .2
----------------------------------------------------------------
12 6 .2
10 7 .5
com m unic ations
Pr i n t i n g
Ot h e r
p r o p e r ty
—
9 2 .0
—
---------------------------------------------
En t e r p r i s e
Su p p lie s
Eq u i p m e n t
Ad d e n d u m :
So u r c e :
—
---------------------------------------------------
o t h e r
Fu e l
developm ent
n o n r e s i d e n ti a l
Le s s :
A l l
---------------------------------------------
------------------------
Co n s e r va tio n
A l l
---------------------------------------- ---
h o s p i t a l s
I n d u s t r i a l
Ot h e r
------------------------------------------------------
f a c i l i t i e s
M i l i t a r y
19 4 .5
and
and
and
u t i l i t i e s
r e p r o d u c tio n
m a t e r i a l s
No n -c o m p e n s a tio n
Go v e r n m e n t
D i v i s i o n ,
13 8 .9
-----------------------------
Bureau
o f
Ec o n o m i c
An a l y s i s
(see
t e x t ) .
142
D.
Of f i ce of Management and Budget ' s Def l at or
The 0MB st af f has pr epar ed a def l at or f or Feder al
For t he Nat i onal
Def ense por t i on,
t hr ee i ndexes ar e used:
Pr i ce I ndex f or Mi l i t ar y Ret i r ed Pay,
above f or ot her Depar t ment
of
and t he Commer ce Depar t ment
budget out l ays.
The Cons umer
t he DOD i ndex descr i bed i mmedi at el y
Def ense and Mi l i t ar y Assi st ance out l ays,
def l at or f or Feder al
Pur chases of Goods and
Ser vi ces f or ot her def ense i t ems ( most l y at omi c ener gy
and
defense
s t oc k pi l es ) .
E.
Depar t ment of t he Ar my' s I ndex
As an exampl e of wor k per f or med among t he Ar med Ser vi ces,
t he
Depar t ment of t he Ar my pr epar es an i ndex of pr i ce change i n or der t o
exami ne
' cost gr owt h" —^ The i ndex excl udes per sonnel
compensat i on and,
f or t he most par t ,
heav y r el i ance i s pl aced on BLS pr i ces f r om t he Whol e
sal e Pr i ce I ndex.
I n f act ,
t he r epor t ,
pr esent i ng t he dat a,
st at es:
i he pur pose of t hi s anal ysi s was t o der i ve an i nt er f ace or cr osswal k
f or t he t ot al
Ar my Budget
by appr opr i at i on f r om t hi s myr i ad of speci f i c
i ndi ces and wage r at es av ai l abl e f r om t he Bur eau of Labor St at i st i cs,
f r om i ndi vi dual
economy,
pr i ces f or goods and ser vi ces av ai l abl e i n t he pr i vat e
and f r om speci f i c i ncr eases i n appr ov ed DOD t ar i f f r at es. "
Thi s r epor t cont ai ns a somewhat
puzzl i ng st at ement
t o t he ef f ect
t hat ,
" Whi l e i t woul d be hi ghl y desi r abl e t o r el at e t he cost gr owt h t o o n c e
changes ent i r el y wi t hi n t he Ar my pr oc ur ement
st r uct ur e,
t he 0MB gui de
l i nes i mposed upon t he Depar t ment of Def ense do r equi r e t hat
i nf l at i on
vJoTrrTTTrT* and J. St ephen Tur
Mi ll ii tt aarr yy rPrr ii ece
I ndi ces,
' u iet
c ut ,, " Mi
e if
Fr l J/ 3 Ar my Budget ,
Of f i ce of Assi st ant Di r ect or of Ar my Budget f or
Resour ces, Oc t ober 1971.
14 3
i ndi ces be chosen t o r ef l ect
not
gener al
f or ces at wor k i n t he ec onomy and
i ndi ces pr i mar i l y i nf l uenced by Def ense deci si ons. "
I n any event ,
ammuni t i on,
f or Pr oc ur ement
t he Ar my used 3LS i ndexes,
ex cept f or
aut omat i c dat a pr ocessi ng and some i t ems of communi c at i on
and el ect r i c equi pment ,
wher e DOD pr i ci ng was used.
For Mi l i t ar y Con
st r uct i on speci al
est i mat es based on si mul at ed bi ds wer e made by t he
" DOD communi t y. "
For oper at i on and mai nt enanc e 75 BLS i ndexes ( l ar gel y
WPI
but i ncl udi ng some CPI
ser i es)
wer e used,
especi al l y f or Ar my t r anspor t at i on.
pl us some D()D ser i es,
For ADP ser vi ces,
const r uc t ed i t s own i ndex f r om out si de sour ces;
gover nment owned cont r act or oper at ed ( COCO)
val ues.
For Medi cal
and WPI
pl ant s,
i t used DOD uni t
Pr ogr am of t he Uni f or med Ser vi ces)
Dr ugs and Phar maceut i cal s,
i ndex pr esent s a vast amount of usef ul
of
f or mai nt enanc e of
Car e BLS Consumer Pr i ce dat a wer e used f or t he
CHAMPUS ( Ci vi l i an Heal t h and Medi cal
pr ogr am;
t he Ar my
pr i ce change est i mat es.
f or Medi cal
det ai l
Suppl i es.
Thi s
on t he r el at i ve i mpor t ance
I t i s unf or t unat e t hat much r el i ance had t o
be pl aced on sour ces out si de DOD f or pr i ce dat a.
F.
Speci al
St udi es
Ther e have been a number of speci al
meas ur ement
st udi es cover i ng pr i ce t r end
f or br oad phases of t he DOD pr ogr am,
wi t h pr oduct s and cl asses of pr oduct s ( e. g. ,
as wel l
as some deal i ng
ai r cr af t ,
s hi ns ) <> These
ar e deal t wi t h i n t he appendi ces,
or , wher e per t i nent ,
i n appr opr i at e
sect i ons i n Chapt er VI I .
at t ent i on i s cal l ed t o t he wor k of
Campbel l
Speci al
and Sny der on ai r cr af t ,
Mai n and Fet chko on shi ps,
Dei Rossi
on ai r c r af t
and shi ps,
t o Wi nest one on t he ent i r e budget
to
pr i ci ng
14 4
and t o a st udy of DOD Resear ch and Devel opment pr i ce change by 3LS
f or t he Nat i onal
Sci ence Foundat i on.
145
PRI CI NG THE MI LI TARY BUDGET
VI I .
A.
Di r ect Pr i ci ng - Needs and Possi bi l i t i es
1.
Necessi t y f or Rel evant
Pr i ci ng
An ear l i er sect i on descr i bed a number of pr i ce i ndexes f or
t he Depar t ment of Def ense or f or some par t of
t hese,
i ncl udi ng t hose al r eady not ed,
pai nst ak i ng ef f or t
l i mi t at i on, however :
( non- per sonnel )
Many of
r epr es ent a l ar ge amount of
i n t hei r or gani zat i on,
t o pr obl ems of cl assi f i cat i on.
t he Depar t ment .
const r uct i on,
and at t ent i on
They have i n common one ov er i di ng
t hei r al most compl et e r el i ance i n t he pr oduct
cat egor i es on sur r ogat e pr i c i ng.
Pr i ce movement s of
i t ems of a pur el y mi l i t ar y char ac t er ar e r epr es ent ed ei t her by pr i ce
i ndexes of
" di st ant r el at i ves"
f r om t he Bur eau of Labor St at i st i cs
\
Whol es al e or Cons umer Pr i ce I ndexes or f r om some ot her gover nment al
or t r ade as soci at i on sour ce.
f r om WPI
and CPI
I n ot her i nst ances est i mat es ar e cons t r uc t ed
ser i es and BLS wage r at es.
eas i er __f or t he " shel f "
Even wher e t he pr i ci ng i s
i t ems — t he pr i vat e sect or ser i es ar e used.
of such i ndexes means t hat t he di f f er ence bet ween measur es of
Use
pr i ce
movement s i n mi l i t ar y pur chases and f or t he pr i vat e economy ar e l ar gel y
a mat t er of t he di f f er ent wei ght i ng schemes and i ndex f or mul ae empl oyed.
Use of
i ndexes bor r owed f r om t he pr i vat e sect or i s . j ust i f i ed,
t he pr i ce movement s of
i t ems i n t he pr i vat e sect or cl osel y par al l el
movement s of def ens e pur chases.
as s umed.
Even wher e t he pr oduct ,
But t hi s needs t o be demonst r at ed,
sel l i ng i n pr i vat e mar ket s,
cl ose r esembl ance t o i t s def ense count er par t ,
det ai l ed speci f i cat i on,
t ol er ances,
t he t er ms of
if
t he
not
bear s a
sal e,
vol ume,
di scount s and ot her pr i ce det er mi ni ng
char ac t er i st i cs ar e qui t e l i kel y t o di f f er mat er i al l y.
Whi l e i t i s no
146
doubt
t r ue t hat
some pur chased i t ems may have pr i ce movement s suf f i c i ent l y
si mi l ar t o t hose i n t he pr i vat e economy t o war r ant
t hei r use,
t hi s
deci si on shoul d come af t er t est i ng and not on t he basi s of an unt est ed
assumpt i on.
A si mi l ar pr ecaut i on appl i es t o use of pr oxy measur es f or i mpor t ed
goods and ser vi ces.
Domest i c ci vi l i an pr i ce t r ends ar e unl i kel y t o r epr esent
t he t r ends of i mpor t pr i ces and use of t he expor t
pr i ce movement s of t he
f or ei gn suppl i er woul d al so pr ove unsat i sf ac t or y because of f l uct uat i ons
i n exchange r at es,
shi ppi ng char ges,
pr i ci ng of i t ems pur chased abr oad,
es peci al l y i mpor t ant
i nsur ance,
as wel l
et c.
However ,
separ at e
as separ at e wei ght i ng,
ar e
f or t hose nat i ons whos e def ense budget s cont ai n a
r el at i vel y hi gh pr opor t i on of i mpor t ed goods and ser vi ces.
Even i n t he
Uni t ed St at es i ndex, wher e f or ei gn pur chases ar e of l esser i mpor t ance,
a separ at e sub- i ndex of pr i ce change f or i mpor t ed i t ems mi ght be of
i nt er est .
Ther e i s at l east one i nst ance wher e a t est
sui t abi l i t y of ci vi l i an mar ket
pr i ces. “
has been made of t he
The i ndex of mat er i al s pr i ces
speci al l y col l ect ed f or t he st udy of Ar my R&D pur chases was compar ed
wi t h an i ndex of i t ems chosen f r om t he WPI and combi ned wi t h t he
V
See " Exper i ment al I nput Pr i ce I ndexes f or Resear ch and Devel opment
Fi sca Tear s 1961- 65/ NSF- 70- 7, a r epor t by t he Bur eau of Labor
st at i st i cs t o t he Nat i onal Sci ence Foundat i on, page 155.
147
wei ght s of t he R&D pr oj ect .
The WPI
pr oduct s wer e mat ched agai ns t
pr oduct s i ncl uded i n t he R&D st udy t o t he ext ent
possi bl e.
The t wo
i ndexes ar e:
WPI
R&D Pr i ces
Pr i ces
1961
100. 0
100. 0
1962
97. 1
102. 6
1963
95. 9
104. 2
1964
95. 7
100. 8
1965
96. 4
99. 9
The st udy st at es:
i . e. ,
f r om t he pr oducer ,
" For t he WPI ,
and wi l l
t he pr i ces obt ai ned ar e f . o. b. ,
not r ef l ect
pr i ce movement
f or
r esear ch and devel opment because t he l at t er i s of t en at t he di st r i but or
or r et ai l
l evel ;
. . . pr i ces f or many i t ems sol d t o t he gover nment ar e
negot i at ed and ar e of t en based on l ar ge,
of
het er ogeneous l ot s,
wi t h t er ms
sal e unr el at ed t o t hose t hat appl y t o si mi l ar goods or commer ci al
mar ket s. "
" Anot her pr obl em . . .
i s t hat pr oduct s i ncl uded i n t he R&D
pur chases ar e di ss i mi l ar t o t hose i n t he WPI .
of pr oduct s i n some cat egor i es,
pr i mar y and f abr i cat ed met al s;
Ther e i s some si mi l ar i t y
such as chemi cal s and al l i ed pr oduct s;
machi ner y;
and l umber ,
f ur ni t ur e,
of f i ce
148
equi pment ,
and cont ai ner s,
t o compar e . . .
i n t he WPI
but wi t h t hese except i ons,
no cannons,
demol i t i on
bl ocks,
. . . The ' el ect r oni cs syst ems'
t her e i s l i t t l e
or gun br eech assembl i es
whi c h ar e pr i ced f or t he WPI
ar e home t ype r adi os and t él évi si on set s. "
" Fi nal l y . . . t her e i s al so consi der abl e di f f er ence bet ween
speci f i c at i ons f or mi l i t ar y and consumer usage.
The WPI
d ata
on phot o
gr aphi c equi pment and suppl i es cover s i t ems l ar gel y f or ci vi l i an use
whi l e some suppl i es ar e compar abl e t o R&D i t ems,
and,
di f f er s gr eat l y.
( I n t he 1961- 1963 R&D sur vey,
pr i ced at $63, 000. )
t he most
par t ,
t her e was one camer a
The f ood i t ems pr i ced i n t he R&D st udy wer e,
t he R&D st udy t he ' l i vest ock'
even cockr oaches.
. . .
i ncl ude st eer s,
wer e r abbi t s,
cat s,
hogs,
r at s,
The cl ot hi ng pr i ced f or t he WPI
wor n i n ever yday pur sui t s,
l ambs,
et c . - i n
monkeys,
snakes,
i s gener al l y
wher eas t he R&D cl ot hi ng i t ems wer e f or
or pr ot ect i ve use. "
Ot her st udi es have poi nt ed t o t he need f or di r ect
i t ems.
f or
ex per i ment al l y pr epar ed and packaged f or mi l i t ar y use.
The l i vest ock pr i ced f or t he WPI
exper i ment al
t he equi pment
I n 1971 Snyder poi nt ed out
t o measur e t he i mpact of
t hat
pr i ci ng of mi l i t ar y
t he t wo r esponses t o r equest s
i nf l at i on on DOD pur chases bot h r el i ed l ar gel y
149
on BLS pr i ce i ndexes f or t he pr i vat e mar ket . - ^
a bad appr oach on t wo count s;
whi ch mi ght
pr i ce.
pr i ce t r ends,
buyer ' s pr i ce cont r over sy,
onl y t o t he pr i vat e mar ket .
I t i s wel l
At pr esent ,
" t hi s i s
. . . BLS dat a ar e sel l er s'
gi ve a mi sl eadi ng vi ew of act ual
st andi ng t he sel l er ' s vs.
a di f f er ent
( 1)
He st at es:
pr i ce dat a
( 2) not wi t h
BLS dat a per t ai ns
known t hat DOD f r equent l y pays
we have no way of knowi ng what
t hat
pr i ce i s. "
The r eason t he " di f f er ent
pr i ce"
of compi l at i on has been est abl i shed.
be abl e t o f i nd out .
i s unknown coul d be t hat no pr ogr am
Cer t ai nl y,
Snyder cont i nues:
someone mus t
know,
or
" Fi r st , we shoul d meas ur e t he
di f f er ences bet ween t he pr i ces pai d by pr i vat e and publ i c ent i t i es bef or e
we concl ude t hat
t her e ar e no si gni f i c ant di f f er ences.
i ndi ces ar e used f or many di f f er ent
ot her such casual
pur poses.
Second,
pr i ce
Newspaper ar t i cl es and
anal yses ar e not ver y demandi ng on t he under l yi ng dat a.
Mi l i t ar y pl anner s and cost anal yst s,
however ,
est i mat e t he cost of maj or
weapons syst ems by usi ng CER' s [ Cost Est i mat i ng Rel at i onshi ps]
model s whi ch l i nk weapons'
const ant dol l ar s . . .
or cost
char act er i st i cs t o cost as ex pr es sed i n
I n f act ,
t her e i s some evi dence t hat pr i ces f or
mi l i t ar y goods ar e f ar mor e vol at i l e t han t he sl uggi sh pr i ce i ndex
t r ends based on BLS dat a woul d l ead us t o bel i eve.
2/
”
" Pr obl ems wi t h Pr i ce I ndi ces i n Def ense Pl anni ng" , Chr i st opher L.
Snyder , Jr . , Of f i ce of t he As si st ant Secr et ar y of Def ense ( Syst ems
Anal ysi s) May 20, 1970.
The t wo i ndexes wer e pr epar ed by OASD ( SA)
and OASD ( C) .
150
" Some speci al
Ber kowi t z has t hi s t o say—
comment s can be made
conc er ni ng i ndi ces t hat cover def ense pr ocur ement
t echnol ogy commodi t y cl asses) .
Most
i t ems ( i . e. ,
new
speci al l y t ai l or ed i ndi ces ar e
bui l t up f r om subi ndi ces i n t he Whol es al e Pr i ce I ndex and f r om t he BLS
r epor t of
l abor r at es f or Pr oduct i on Wor ker s i n Sel ect ed I ndust r i es.
The . . . anal yst who uses t hese t wo i ndi ces i n devel opi ng a ( pr oper l y
wei ght ed)
composi t e i ndex f or a new t echnol ogy ar ea must
t he r esul t i ng i ndex,
unl ess pr oper l y adj ust ed,
be awar e t hat
woul d cont ai n cer t ai n
weak nes s es :
The r esul t i ng i ndex woul d be an i nput
The r esul t i ng i ndex woul d not
of pr of i t ,
t axat i on,
pr i ce i ndex . . .
t ake i nt o consi der at i on r at es
and ot her i ndi r ect cost s.
The i ndex woul d i gnor e pr oduc t i vi t y changes . .
The i ndex woul d r ef l ec t
pr i ce changes of mat er i al s t hat may be
onl y pr oxi es f or t he mat er i al s ac t ual l y used i n t he pr oduct i on
of def ense goods.
Hence,
t he pr i ce movement s of
t he speci f i c
i t ems needed f or t he new t echnol ogy goods may be ver y di f f er ent
f r om t hose f or t he i t ems i n t he Whol esal e Pr i ce I ndex.
Unl ess speci al
adj ust ment of
i ndi r ect
l abor i s made,
such
i ndi ces woul d r ef l ect onl y t he cost of pr oduct i on wor ker s
and hence may not adequat el y r ef l ect t he changes i n sal ar i es
of pr of essi onal
3/
and manager i al
per sonnel . "
Ber kowi t z, Rober t D. , " A Sur vey of Sel ect ed Pr i ce I ndi ces Sui t abl e
f or Use by t he Cost Anal ys i s Gr oup, " I DA N- 740( R) , I nst i t ut e f or
Def ense Anal ysi s, Januar y 1970.
151
Ber kowi t z' s f i r st ,
t hi r d and poss i bl y second poi nt s ar e concept ual ,
r el at i ng t o t he desi r ed i ndex goal .
ear l i er .
They have l ar gel y been cover ed
The l ast poi nt cal l s at t ent i on t o a dat a gap of
i f pr oduc t i vi t y or l abor cost
But t he f our t h poi nt
i mpor t ance,
i s bei ng used.
i s cent r al
t o a mi l i t ar y pr i ce ser i es pr epar ed
under any concept and cannot be avoi ded by r esor t i ng t o an i ndex pr epar ed
under some ot her concept .
The f ol l owi ng st at ement by Wi nest one and Beckl er i s i ncl uded i n t he
r epor t on t hei r own pai nst aki ng but
mi l i t ar y pr i ce i ndex- 7 :
ser i es,
" I n r espec t
pr el i mi nar y ef f or t
t o cons t r uc t a
t o t he sour ce of t he bor r owed pr i ce
t he i ndexes empl oyed wer e t hose used by OBE i n connect i on wi t h
t hei r GNP def l at i on f or speci f i c dur abl e goods.
For exampl e,
t hei r
pr i ce i ndex f or ci vi l i an ai r c r af t was sel ect ed f or bot h mi l i t ar y ai r cr af t
and mi ssi l es.
Si mi l ar l y f or t he ot her f our el ement s,
f ol l owi ng OBE def l at or s,
Tur bi nes;
r espect i vel y:
Communi cat i ons Equi pment ;
t her e wer e t he
Shi ps and Boat s;
Speci al
Engi nes and
I ndust r y Machi ner y,
et c.
" The use of pr i ces of ci vi l i an i t ems f or est i mat i ng pr i ce changes
of mi l i t ar y pr oduct s i s i nappr opr i at e i n pr i nci pl e.
Such pr act i ces ar e
accept abl e onl y when ci vi l i an goods ar e pr oduced f r om t he same ki nd of
sour ces as mi l i t ar y goods ( e. g. ,
shoes and f ood) ;
t hi s i s t he case wi t h
4/ Wi nest one, Rober t L. , and Ber nar d S. Beckl er , " Mi l i t ar y Pr i ce I ndex:
Pr el i mi nar y Pr esent at i on, " Resear ch Anal ysi s Cor por at i on, Januar y
1968,
page 30.
152
5/
some O&M pur chases. —
( e. g. ,
However , when mi l i t ar y pr oduct s ar e so di f f er ent
t anks and mi ssi l es) ,
t he use of ci vi l i an pr i ce i ndexes can be
j ust i f i ed onl y by t he desi r e t o obt ai n qui ck r ough- cut appr oxi mat i ons.
Subs equent
i t er at i ons must cont ai n i mpr oved pr i ce dat a f or t hi s budget
cat egor y and make oper at i onal
adj ust ment s t o account
f or pr oduct changes. "
Thes e st r ong sent i ment s comi ng f r om t he aut hor s of a t hought f ul
pr es ent at i on of mi l i t ar y pr i ce i ndexes mer i t at t ent i on.
st em f r om use of
I ndex,
i ndexes,
Thei r caut i ons
such as t hose f r om t he BLS Whol es al e Pr i ce
t ai l or ed as t hey ar e t o ci vi l i an mar ket s,
as pr oxi es f or mi l i t ar y
pr i ce movement s.
Ther e i s anot her r eason,
caut i ous.
l esser i mpor t ance,
The BLS i ndexes ar e sel l er ' s pr i ces;
cases sal es ar e f . o. b.
pr i ce,
of somewhat
del i ver ed,
f act or y.
i . e. ,
t o be
i n al most al l
For pur poses of a mi l i t ar y pur chase
t r ansact i on pr i ces ar e needed.
One r eason t hese t wo pr i ces can di f f er i s t hat t her e may be speci al
di scount s gi ven,
whi ch may not show up i n t he WPI
account of t he usual
di scount s,
wher e gener al l y appl i cabl e) .
i n t he WPI
such as cash,
Thi s pr obl em,
as some anal yst s have assumed.
( t he WPI
vol ume,
however ,
does t ake
seasonal ,
et c. ,
i s not as uni ver sal
I t does af f ect
sel ect ed
5/ The wr i t er s agr ee t hat t hese ci vi l i an pr i ce t r ends ar e most l i kel y
t o f ol l ow mi l i t ar y pr i ce t r ends f or si mi l ar pr oduct s, but even her e
t er ms of sal e and vol ume ar e so di f f er ent t hat compar i son t est s ar e
advi sabl e.
153
ser i es,
vs.
fi /
a l i st of whi ch i s avai l abl e f r om BLS. —
del i ver ed pr i ce,
however ,
The quest i on of f . o. b.
i s mor e i mpor t ant and i ncl udes t he pr obl em
of how t o handl e t r anspor t at i on,
whi c h i s di scussed i n Chapt er
III,
Pr i ci ng i n Gener al .
A f ew obj ect i ons t o usi ng POD pur chase pr i ces mer i t at t ent i on:
Use of POD pr i ce dat a woul d be s us pec t .
a.
accused of
ar gument ,
pr epar i ng sel f - ser vi ng st at i st i cs.
but one of cr edi bi l i t y,
dat a woul d have an agency bi as,
DOD woul d be
Thi s i s not a st at i st i cal
ex pr essi ve of a f eel i ng,
not t hat DOD
but t hat t he publ i c woul d t hi nk i t had.
Thi s obj ect i on coul d be over come by havi ng DOD const r uct t he i ndex as a
j oi nt ef f or t wi t h a r el i abl e st at i st i cal
of met hods,
sampl i ng,
b.
qual i t y adj ust ment ,
agency,
par t i c ul ar l y on mat t er s
et c.
Cont r act or s somet i mes bi d l ow t o obt ai n a c ont r ac t , and
l at er cov er cost s by over - r uns or ov er - pr i ced change or der s.
i ndeed be a pr obl em,
but
Tni s may
i t i s one t hat can be mi ni mi zed by payi ng car ef ul
at t ent i on t o t he dat a sampl ed,
es peci al l y i n t he pr oc ur ement ar ea.
i s gr ant ed t hat
be di f f i c ul t t o pr i ce.
c.
t hi s ar ea wi l l
It
Lear ni ng cur ves ar e used i n t ne pr ocess of negot i at i ng
pr i ces f or subsequent
r uns of a compl ex i t em.
I t i s di f f i c ul t
to
6/ f or t wo v i ews on t hTs subj ect , see: St i gl er , Geor ge J. and James
— v K- i nHahl
The Behavi or of I ndust r i al Pr i ces, Nat i onal Bur eau
di t y: BLS Whol es al e Pr i ce Quot at i ons,
St af f P a p e r No . 9,
st at i st i cs of t he Feder al Gover nment , a r epor t of t he Pr i ce St a
i H I B l i V vi ew Commi t t i e~ a r Jt he~Nat i onal Bur eau of Ec onomi c Re¡ ¡ r » t o » ¡ Bur eau of t he Budget ; Hear i ngs bef or e t he Subc ommUt ee
on Ec onomi c St at i st i cs of t he Joi nt Economi c Commi t t ee of t he
Conqr es s , Januar y 24, 1961; and Cl or et y, Joseph C. ,
Meas ur i ng
Changes i n i ndust r i al Pr i c es “ , Mont hl y. l abor Rgvi ew, Nov ember 1970.
15 4
eval uat e t hese i n connect i on wi t h pr i ce i ndexes.
r ef l ect
pr i ces ac t ual l y pai d,
negot i at ed,
no mat t er how t he pr i ces came t o be
ex cept as not ed i n
d.
bel ow.
Uni t pr i ces dr op dr as t i cal l y as goods pass f r om Resear ch
^•
and Devel opment
t ypes of
The pr i ce i ndex shoul d
t o pr oduct i on.
pr oduct .
Thi s pr obl em can be ser i ous f or some
Pr i ce i ndexes f or t he ci vi l i an economy ar e f aced
wi t h si mi l ar pr obl ems each t i me a new i t em i s i nt r oduced.
i ndex st at i st i ci ans assess each i ndi vi dual
j udgment
so t hat
The pr i ce
si t uat i on and make a
t he i t em i s i nt r oduced at a pr i ce t hat r epr esent s i t s
es t abl i s hed val ue on t he mar ket ,
f r ee of devel opment cost s.
Al so,
and ot her shor t - l i ved pr oduct s ar e avoi ded by r easonabl e del ay.
si mi l ar appr oach coul d be appl i ed t o mi l i t ar y pr i ci ng.
separ at e f r om t he l at er pr oduct i on cont r act
Thi s i s not
ment
t he case i n ci vi l i an mar ket s,
A
I n some r espect s
RDT&E i s of t en cost ed under
t he DOD si t uat i on may make mat t er s si mpl er :
a cont r act
f ads
f or t he i t em.
wher e t he r ecapt ur e of dev el op
cost s may be ext ended i n t i me and may be mor e di f f i c ul t f or t he
pr i ci ng anal yst
ei s a f undament al
t o eval uat e.
Change or der s ar e di f f i c ul t
t o ev al uat e.
Tr ue,
r eason DOD pr i ci ng ef f or t s ar e necessar y.
but t hi s
Possi bi l i t i es
of deal i ng wi t h t hi s i mpor t ant quest i on ar e di scussed bel ow and i n t he
appr opr i at e sect i ons of t he budget cat egor i es.
f.
I n some cases,
¿ur c_hases may be t he cause of
t ant agai ns t t he use of
becaus e of t he danger of
DOD may be t he maj or buy er , and i t s
pr i ce r i s es .
Thi s ar gument woul d be i mpor
i ndexes f or escal at i on of cont r act
pr i ces
t he i ndex meas ur e becomi ng a sel f - gener at i ng
155
act i vat or of
spi r al i ng pr i ces.
But t hi s ar gument woul d not
hol d i f an
i ndex i s used t o meas ur e pr i ce movement s as t hey exi st wi t hout
r egar d
t o cause.
2.
Poss i bi l i t y of Di r ect Pr i ci ng
The di f f i cul t i es of
pr i ci ng nonhomogeneous pr oduct s of mi l i t ar y
pur chase have been al l owed t o obsc ur e t he possi bi l i t i es.
A gr eat many
i t ems ar e r el at i vel y homogeneous and shoul d pose no gr eat pr obl em.
so- cal l ed " shel f
i t ems, " f or exampl e,
t he vast ar r ay of
The
i t ems, many of
whi ch ar e phy si c al l y si mi l ar t o t hei r ci vi l i an count er par t s r epr es ent ed
i n t he WPI ,
can be pr i ced i n t he cont ext of
DOD' s speci al
t er ms of
pur chase.
Favor abl e pr ospect s f or pr i ci ng some of t he mor e compl ex
i t ems wi l l
be di sc us sed bel ow under Pr ocur ement .
Per haps t he most f avor abl e i ndi cat i on f or di r ect pr i ci ng i s t o be
f ound i n hi st or y.
Di r ect
pr i ci ng of mi l i t ar y i t ems was car r i ed out on
a consi der abl e scal e i n Wor l d War
i ndex,
cal cul at ed mont hl y,
pr i ces.
Appendi x VI I - A desc r i bes a pr i ce
f or 711 ser i es of Navy Depar t ment
The pr i ce dat a or i gi nat ed i n i ndi vi dual
i t ems such as pet r ol eum pr oduct s,
t ext i l e pr oduct s, met al s and met al
pr oduct s,
such as paper ,
change was possi bl e,
pr oduct s,
but
cont r act
cont r act s and cover ed
cl ot hi ng and f oot wear ,
t ext i l es and
f oods and t obacco and ot her
l umber and chemi cal s.
pr oduct s wer e not avoi ded,
sever al
II.
The het er ogeneous
" wher e dol l ar adj ust ment f or speci f i cat i on
t hi s adj ust ment was made.
I n ot her cases,
obser v at i ons wer e avai l abl e f or each speci f i cat i on,
wher e
t he i ndex
15 6
was cons t r uc t ed by l i nki ng t oget her t he set s of obser vat i ons . . .
The r epor t t ook not e of
pur chased;
t he l ar ge number and var i et y of goods
but because of t he hi gh concent r at i on of dol l ar val ue of
pr oc ur ement
i n a smal l
pr opor t i on of t he t ot al
number of
i t ems bought ,
i t was possi bl e t o obt ai n r epr es ent at i venes s wi t h r el at i vel y f ew i t ems
account i ng f or mor e t han 60 per cent of t ot al
The f act t hat conc ent r at i ons of
sel ect i on of
a sampl e of
dol l ar val ue of cont r act s.
hi gh val ue exi st
i t ems easi er .
shoul d make t he
Thi s pr obl em wi l l
be di scussed
under " sampl i ng. "
The BLS- NSF st udy di sc us sed ear l i er cont ai ned a not e
of opt i mi sm,
i n suggest i ng t hat
al so,
audi t or s mi ght
be ut i l i z ed- - wi t hout
obt ai n dat a on det ai l ed cont r act
( at l east f or R&D)
t he r esi dent
si gni f i c ant addi t i on t o wor k l oad- - t o
cost s,
pr i ces on maj or mat er i al
pr oc ur e
ment ,
such as sub- assembl i es,
pr i ces on some over head i t ems ( t axes,
et c. )
and cont r act val ues of
subcont r act or s ( as an ai d i n t he event
r ent ,
it
became necess ar y t o pur sue some quest i ons i nt o t he subcont r act s) .
I n any pr i ce i ndex t he i mpor t ance of r easonabl y r el i abl e pr i ce dat a
f ar over shadows t he quest i ons of wei ght s and cl as si f i cat i on i n det er mi ni ng
r el i abi l i t y .
The pr oxy ser i es i n use have put sever e l i mi t at i ons on t he
usef ul ness of a number of r ecent mi l i t ar y pr i ce i ndex st udi es- - not onl y
i n t he vi ew of t he pr esent wr i t er s but al so i n t he vi ew of a number of
t he compi l er s and anal yst s of
I n vi ew of t he oper at i onal
U
t hose dat a,
meas ur ement
" I ndexes of Navy Cont r act Pr i ces, "
i ndexes wer e cons t r uc t ed as par t of
and wer e par t of a br oader pr ogr am
agenci es wor k i ng wi t h t he Bur eau of
some of whom ar e quot ed above.
pr ogr am i n Wor l d War
II,
and mor e
1945, Depar t ment of t he Navy.
The
a j oi nt ef f or t dur i ng Wor l d War I I
cover i ng a number of gover nment
Labor St at i st i cs.
157
r ecent exper i ment s concer ni ng f eas i bi l i t y of pr i ci ng,
however ,
i t seems
t hat a pr ogr am of di r ect pr i ci ng can and shoul d get under way as a next
B.
s t ep.
For mul a Appl i cat i ons
Chapt er I I on Concept s and For mul at i ons cont ai ns suggest i ons on
choi ces of f or mul a and r ecommendat i ons f or bot h exper i ment al
i mmedi at e appl i cat i on.
wei ght
Speci f i c di scussi ons on i ndex base,
base ar e pr esent ed i n t hi s chapt er .
wei ght s and
These can be f ul l y expl ai ned
onl y i n t he l i ght of speci f i c need and pr act i cal
1.
wor k and
possi bi l i t i es,
however .
I ndex Base
The choi ce of base
chosen as 100. 0)
p e r io d
of
t he i ndex ( t he mont h or year
i s of cons i der abl y l ess i mpor t ance t han t he choi ce of
wei ght s and wei ght
base.
Never t hel ess,
t he y ear chosen shoul d be
r el at i vel y r ec ent , i f onl y f or psychol ogi cal
r easons.
I t i s easi er t o
vi sual i ze per cent age changes i n pr i ces i f a year i n t he r ecent past
ci t ed.
is
Thi s i s a pr i mar y r eason f or per i odi c al l y changi ng gover nment
i ndex number base per i ods. —^
Whi l e i t i s desi r abl e t o updat e t he i ndex base per i odi cal l y,
ar e di sadvant ages t o changi ng i t t oo f r equent l y;
ar e al so mai nl y psychol ogi cal .
t hese di sadvant ages
I n per i ods of r i si ng pr i ces each t i me
t he i ndex base i s updat ed ^ s t ar t ed agai n at 100)
t he subsequent
number s ar e smal l er t han t hey woul d have been on t he ol d base,
smal l er number s ar e decept i ve.
changes i n t he act ual
t he base
i ndex
and t he
Al so, y ear - t o- y ear or mont h- t o- mont h
val ue of t he i ndex number wi l l
had not been changed.
t her e
Thus,
be smal l er t han i f
an i ndex number f or 1971 of
8/ The Whol es al e Pr i ce I ndex has had t he f ol l owi ng i ndex bases:
1913,
1926, 1947- 49, 1957- 59, and 1967 =1 0 0 ; t he Consumer Pr i ce I ndex has
had 1913, 1923- 25, 1935- 39, 1947- 49, 1957- 59, and 1967 = 100.
15 8
115. 5 ( 1960 = 100) woul d be 110. 0 ( 1970 = 100) ,
105. 0 ( 1960 = 100) .
The act ual
number of
i ndex poi nt s change f r om
1970 t o 1971 woul d be 10. 5 on t he 1960 base,
base.
However ,
10 year s)
but
but onl y 10. 0 i n t he 1970
t he per cent age change woul d be t he same no mat t er whi c h
base wer e used ( 10. 5/ 105. 0)
A usef ul
i f t he 1970 i ndex wer e
= ( 10. 0/ 100. 0)
= 10 per cent .
sol ut i on i s t o change t he i ndex base i nf r equent l y ( up t o
i ssue y ear - t o- y ear per cent age change t abl es.
t he i ndex base i s changed,
hi st or i cal
Then,
when
dat a f or a number of year s can be
shown on t he ol d and new base f or a shor t
per i od of t i me t o ac cust om t he
us er t o t he change- over .
The i ndex base i ni t i al l y sel ect ed shoul d be a r ecent
year dur i ng
whi c h act i vi t i es meas ur ed ar e on t he whol e r at her pedest r i an,
unusual
a y ear
hi ghs or l ows.
For a pr i ce i ndex,
t he hi gh or l ow year t o be as si gned 100,
cur i ous l y l ow ( or hi gh) .
It
To do ot her wi s e woul d cause
and al l
ot her year s t o appear
I t woul d be pr ef er abl e f or t he abnor mal
t o st and out on t he t abl e as unusual ,
r at her t han al l
ot her year s.
t o numer ous r ev i s i ons — ei t her because t hey ar e st i l l
i s chosen,
r equi r ed,
2.
y ear
i s al so wi se t o sel ect a year f or whi c h t he basi c dat a ar e not
or because t hey ar e based on dubi ous under l yi ng dat a.
y ear
one woul d choose
i n whi ch pr i ces wer e not abnor mal l y hi gh or l ow i n compar i son
wi t h t he year s i mmedi at el y sur r oundi ng i t .
subj ect
f or exampl e,
wi t h no
r evi si on of t he i ndex number s of al l
pr el i mi nar y
I f an unset t l ed
ot her year s wi l l
once r evi si ons i n t he base year ar e made.
Wei ght
Base
The sel ect i on of wei ght s and t he wei ght
base ar e much mor e
be
159
i mpor t ant t han t he sel ect i on of
t he wei ght
t he i ndex base.
Thi s i s t r ue because
base ( t he year or year s chosen t o pr ovi de t he quant i t y or
val ue dat a f or combi ni ng i ndi vi dual
pr i ce dat a)
st r uct ur e of t he i ndex f or t he per i od used.
t o choose a nor mal
year .
Thus,
det er mi nes t he ver y
I t i s,
t her ef or e,
i f mi l i t ar y equi pment nor mal l y r uns i n
t he nei ghbor hood of 10 t o 15 per cent of t he DOD budget ,
a y ear when t hi s cat egor y f el l
t he r el at i ve dol l ar val ues,
ar e i mpor t ant
not
i mpor t ant
one woul d avoi d
t o 5 per cent or r ose t o 25 per cent .
t he act ual
dol l ar amount s of
( Not e:
t he budget ,
i n t hi s cont ext . )
A si i ght l y - 1ess- t ypi cal
av ai l abl e det ai l
year can be chosen i f t he amount of
subs t ant i al l y exceeds t hat
i n t he pr ef er r ed year .
Year s i n whi c h t he Censuses of Manuf act ur er s or Mi ner al s I ndust r i es ar e
t aken ar e of t en chosen f or t hi s r eason.
Thi s consi der at i on may not be
i mpor t ant f or t he mi l i t ar y pr i ce i ndex because t he wei ght dat a ar e
9/
appar ent l y avai l abl e ever y year . - '
At l east
i ni t i al l y,
it
i s desi r abl e t hat
chosen f or bot h t he i ndex base and wei ght
t he i ndex f or mul a or f or mul ae conf or m.
t he same y ear or year s be
base i n or der t hat t he dat a and
Thi s consi der at i on,
whi l e
i mpor t ant ,
shoul d not be gi ven near l y as much consi der at i on i n det er mi ni ng
t he wei ght
base as t he use of a gener al l y t ypi cal
year and,
especi al l y,
t he av ai l abi l i t y of r el i abl e wei ght dat a.
3.
Wei ght s
The wei ght s t hemsel ves wi l l ,
of cour se,
come f r om t he budget
9/ I f t her e have been or wi l l be speci al i n- dept h st udi es of pr oduct
— det ai l cover i ng sel ect ed year s, t hi s st at ement woul d be modi f i ed.
160
val ues.
These val ues ar e t abul at ed i n var i ous br oad combi nat i ons and
cr os s- cl as si f i cat i ons by ac t i vi t y ( pr ogr am cat egor i es) ,
by br anch of
ser vi ce and by obj ect cl as si f i cat i on ( commodi t y and ser vi ce cat egor y) .
Val ues ar e al so shown as expendi t ur es or out l ays and as obl i gat i ons.
The wei ght s ar e of
par amount
i mpor t ance i n at
l east
t wo r es pec t s .
They pr ov i de st r uct ur e t o t he i ndex , di ct at i ng t he r el at i ve i mpor t ance
t hat wi l l
be assi gned t o each commodi t y and ser vi ce pr i ce change;
and
t hey ser ve as a br oad sampl i ng f r amewor k f or deci di ng whi c h cl ass of
i t ems t o use i n t he i ndex and how i nt ensi vel y t o sampl e wi t hi n each
cl ass.
The sampl i ng aspect s ar e di sc us sed bel ow,
a.
Wei ght s and St r uc t ur e.
I f wei ght s ar e est abl i s hed i n suf f i ci ent det ai l ,
of pr esent i ng a var i et y of
i ndexes at var i ous l evel s of det ai l
aggr egat ed accor di ng t o di f f er ent
Exhi bi t VI I - 1
bi l i t i es.
t ot al
and
i nt er medi at e l evel s i s gr eat l y enhanced.
shows t he mi l i t ar y budget
and Eval uat i on,
t he t ask
pr es ent ed i n t wo ways,
f or Resear ch,
Devel opment ,
Test
as an i l l ust r at i on of t he pos s i
These cl as si f i cat i ons f or ot her appr opr i at i ons and f or t he
DOD budget
pr esent
possi bi l i t i es f or comput i ng pr i ce i ndexes f or
each par t of t he t wo cl assi f i cat i on syst ems and f or t he t ot al .
The ot her pr i nci pal
use of wei ght s i s f or sampl i ng- - det er mi ni ng
t he speci f i c pr oduct s or ser vi ces f or whi ch pr i ce i ndex r el at i ves wi l l
be comput ed and whi c h wi l l
t i ve gr oupi ngs.
chapt er .
Sever al
For now,
it
t her ef or e r epr esent al l
i t ems i n t hei r r es pec
sampl i ng met hods ar e di sc us sed l at er i n t hi s
i s suf f i ci ent
t o r evi ew t he i ndex f or mul a br i ef l y
t o cons i der t he pur pose of sampl i ng i n r ef er ence t o t he f or mul a.
161
EXHI BI T VI I - 1
RESEARCH DEVELOPMENT TEST AND EVALUATI ON.
DI RECT OBLI GATI ONS BY OBJECT
CLASS' AND ACTI VI TY, FY 1972. .
( Mi l l i ons of dol l ar s)
Ar my
Ai r
Def ense
For ce______ Agenci es
Navy
Tot al
Obj ect Cl assi f i cat i on
Per sonnel compensat i on - - - - - - - - - - - Per sonnel benef i t s - ci vi l i an - - - - Benef i t s f or f or mer per sonnel - - - - Tr avel & t r anspor t at i on of per sons Tr anspor t at i on of t hi ngs - - - - - - - - - Rent , communi cat i on, ut i l i t i es - - - Pr i nt i ng and r epr oduct i on - - - - - - - - Ot her ser vi ces - - - - - - - - - - - - - - - - - - - - Suppl i es and mat er i al s - - - - - - - - - - - Equi pment - - - - - - - - - - - - - - - - - - - - - - - - - Land and s t r uc t ur es - - - - - - - - - - - - - - Gr ant s, subsi di es & cont r i but i ons —
Tot al
-------------------------
238. 4
20. 0
---12. 8
3. 6
5. 9
0. 6
1, 596. 4
47. 5
60. 5
-------
70. 4
6. 3
*/
l T. O
1. 2
11. 5
3. 3
2, 218. 2
131. 7
28. 5
3. 0
0. 2
1 , 985. 7
2, 485. 3.
306. 6
26. 3
13. 8
1. 1
16. 4
5. 8
28. 7
1. 4
2, 629. 0
41. 6
41. 1
2. 6
0. 6
6. 2
0. 3
441. 6
4. 9
23. 9
3, 096. 9
629. 2
53. 7
*/
42. 8
11.2
52. 3
5. 6
6, 885. 2
225. 7
154. 0
3. 0
1. 0
1. 2
496. 0
8, 063. 9
Pr ogr am by Act i vi t i es
Mi l i t ar y sci ences - - - - - - - - - - - - - - - - Ai r cr af t & r el at ed equi pment - - - - - Mi ssi l es and r el at ed equi pment - - - Mi l i t ar y ast r onaut i cs & r el at ed
equi pment - - - - - - - - - - - - - - - - - - - - - - Shi ps, smal l cr af t and r el at ed
equi pment - - - - - - - - - - - - - - - - - - - - - - Or dnance, combat vehi cl es & r el at ed
equi pment - - - - - - - - - - - - - - - - - - - - - - Ot her equi pment - - - - - - - - - - - - - - - - - - Pr ogr amwi de management & suppor t —
Tot al
-------------------------
V Less t han $50, 000.
Sour ce:
Budget of t he U. S.
176. 1
270. 4
908. 4
144. 4
638. 2
548. 1
144. 5
1, 226. 7
437. 1
10. 4
41. 6
326. 3
A R R
73. 2
93. 4
538. 2
2, 135. 2
1, 987. 0
378. 3
488 9
Q
218. 3
338. 7
63. 4
71. 6
400. 2
152. 0
117. 8
487. 5
356. 9
310. 2
19. 2
407. 6
1, 536. 6
591. 5
1, 985. 7
2, 485. 0
3, 096. 8
496. 0
8, 063. 3
Gover nment ,
Fi scal
Year 1972.
16 2
I ndex f or mul a No.
1 i s t he f or mul a f or t he Laspeyr es pr i ce i ndexes
and may be wr i t t en and cons t r uc t ed as t he r at i o of an aggr egat e of gi ven
y ear pr i ces and base- y ear quant i t i es t o an aggr egat e of base- year pr i ces
and base- y ear quant i t i es or as a wei ght ed ar i t hmet i c mean of
i ndi vi dual
pr i ce i ndexes wi t h base- y ear val ue wei ght s:
E pi «o
£ I
s poQo
W
^
po0o
po %
Thi s f or mul at i on ov er si mpl i f i es t he sol ut i on t o t he pr obl em of
i ndex const r uct i on.
I n t he aggr egat e f or m i t mi ght
seem f r om t he f or mul a
t hat one mus t obt ai n pr i ce dat a f or ever y i t em i n t he i ndex or est i mat e
t he mi ssi ng pr i ces.
The wei ght ed av er age- of - r el at i ves f or m i s mor e
sat i sf ac t or y i n pr act i ce.
Pi
Z
p
0
z
wher e V = val ue,
i t ems.
Rewr i t t en t he f or mul a i s:
x(pi/p0)'v0
P Q
owo
p
z V0
r°
and ( ' ) r epr esent s pr i ce r el at i ves f or onl y t he pr i ced
I n t hi s f or m t he det ai l ed pr i ce r el at i ves of
speci f i ed,
pr oduct s,
i ndi vi dual ,
( P^/ Pq ) 1» ar e wei ght ed wi t h val ues, whi c h cover not
onl y t he pr i ced i t ems but
t he i t ems whos e pr i ces ar e known or assumed t o
move wi t h t he pr i ced i t ems.
Thus,
VQ i ncl udes t he val ue of al l
di r ect l y pr i ced by t he r el at i ve ( Pj / P0 )'
i t ems
pl us t he val ue of t he r el at ed
163
unpr i c ed i t ems i n t he same cl ass.
I n or der f or t he assumpt i on ( t hat t he nonpr i ced or i mput ed pr i ce
movement s appr ox i mat e t hose of t he pr i ced i t ems)
( at t he f i nest l evel
of det ai l
at whi ch i t wi l l
t o hol d,
each val ue
be used as wei ght )
encompass a f ai r l y homogeneous gr oup of pr oduct s.
shoul d
Thei r physi cal
at t r i but es shoul d be si mi l ar and t hei r pr i ce movement s subj ec t t o t he
same gener al
t hat
economi c or mar k et
I t i s mor e l i kel y,
f or ces.
f or i nst ance,
t he " pr i ce" of an unr epr es ent ed empl oy ment cl assi f i cat i on or mi l i t ar y
r ank woul d change wi t h t he sal ar y or pay of an i ncl uded gr ade,
i t woul d move wi t h nonper sonnel
( e. g. ,
t han t hat
i t ems i n one of t he act i vi t y gr oups
ai r cr af t and r el at ed equi pment )
i n t he ac t i vi t y ' c l assi f i cat i on syst em.
i n whi ch i t may have been t abul at ed
Si mi l ar l y,
mi ght be assumed t o have pr i ce movement s,
unpr i ced suppl i es
l i ke pr i ced suppl i es,
obj ect cl as si f i cat i on r at her t han wi t h t he pr i nci pal
i n t he
i t ems i n an ac t i vi t y
gr oup wher e suppl i es ar e used.
For t hi s r eason t he basi c wei ght
st r uct ur e shoul d be based as
near l y as possi bl e on a commodi t y cl as si f i cat i on scheme.
t o be t he obj ect cl as si f i cat i on of t he mi l i t ar y budget .
shoul d t her ef or e be made t o est abl i sh a wei ght
Thi s appear s
Ever y ef f or t
st r uct ur e based on
det ai l ed t abul at i ons of t he obj ect c l as s i f i c at i ons .
These shoul d be
compi l ed f r om t he back- up t abul at i ons f r om whi ch t he budget val ues ar e
pr epar ed.
budget
I f t hi s i s done,
t hen consi s t ent
shoul d al so be s ought .
t abul at i ons of t he ac t i vi t y
The most det ai l ed cl assi f i cat i ons i n t hi s
st r uct ur e shoul d be br oken down by commodi t y gr oupi ngs cons i s t ent wi t h
t hose of t he obj ect cl assi f i cat i on.
I f t hi s can be done,
t he gr oundwor k
164
wi l l
have been l ai d f or pr epar i ng i ndexes by bot h st r uct ur es wi t hout
much mor e ef f or t and c os t — af t er t he i ni t i al
of
i ndexes based on a si ngl e st r uct ur e.
of t hi s i s shown i n Exhi bi t VI 1- 2.
out l ay- - t han t he pr epar at i on
An ov er - s i mpl i f i ed i l l ust r at i on
The pr oduct cl ass i ndexes cal cul at ed
f or t he i ndexes of t he obj ect cl as si f i cat i on syst em ar e used t o cal cul at e
t he ac t i vi t i es - c l assi f i cat i on i ndex.
I t shoul d be not ed t hat an al t er na-
t i ve- - cal c ul at i ng t he ac t i vi t i es i ndex separ at el y,
i t em i n each gr oup t o r epr esent
di f f er ent
t ot al
i ndex.
b.
t he ent i r e gr oup, woul d l ead t o a
For exampl e,
woul d be al l owed t o r epr esent
Av ai l abi l i t y of
usi ng t he pr i nci pal
ai r c r af t
per sonnel
equi pment
pr i ce movement s
and t r anspor t at i on. — ^
Det ai l
The publ i shed dat a on obj ect cl ass val ue ar e t oo br oad t o ser ve
adequat el y f or wei ght s.
cat egor i es ,
e. g. ,
vague i n ot her s,
They encompass t oo gr eat a var i et y i n some
" suppl i es and mat er i al s, " and t hei r meani ng i s t oo
e. g. ,
“ ot her ser vi ces. "
pr ovi de cons i der abl y mor e i nsi ght
of DOD.
The budget back- up dat a, however ,
i nt o t he act ual
These have been used i n set t i ng up t he wei ght i ng st r uct ur e of
some of t he exi st i ng mi l i t ar y pr i ce i ndexes,
r epor t .
For exampl e,
desc r i bed ear l i er i n t hi s
a r ecent r epor t of t he Depar t ment of t he A r my ^
10/ The i ndex cal c ul at ed i n t hi s f ashi on i s 105. 0,
al l owed t o r epr es ent al l i t ems.
11/
nat ur e and magni t ude
equi pment
havi ng been
Lynch, John E. , and J. St ephen Tur et t , " Mi l i t ar y Pr i ce I ndi ces,
FY 1973 Ar my Budget , " Of f i ce of t he As si st ant Di r ect or of Ar my
Budget f or Resour ces, Oct ober 1971, pages 26 and 28. '
165
EXHI BI T VI I - 2
HYPOTHETI CAL I LLUSTRATI ON
Obj ec t
Cl as s i f i c at i on
Dol l ar s
0)
Per s onnel - - - - - - - - - - - - - - Tr ans por t at i on of t hi ngs
Equi pment - - - - - - - - - - - - - - Tot al - - - - - - - - - - I ndex - - - - - - - - - - - - - - - -
1, 000. 0
400. 0
2, 000. 0
3, 400. 0
100. 0
Pr i c e Rel at i v e
T2)
110. 0
95. 0
105. 0
—
Aqqr eqat e
( 1) x ( 2)
1, 100.
380.
2, 100.
3, 580.
0
0
0
0
105. 3
Pr ogr am by Ac t i v i t y
Ai r c r af t
Per s onnel - - - - - - - - - - - - - - Tr ans por t at i on of t hi ngs
Equi pment - - - - - - - - - - - - - - Tot al - - - - - - - - - - - - I ndex - - - - - - - - - - - - - - - -
500. 0
100. 0
1, 000. 0
1, 600. 0
100. 0
110. 0
95. 0
105. 0
Shi ps
Per s onnel - - - - - - - - - - - —
Tr ans por t at i on of t hi ngs
Equi pment - - - - - - - - - - - - - - Tot al - - - - - - - - - - - - - I ndex - - - - - - - - - - - - - - - -
400. 0
100. 0
600. 0
1, 100. 0
100. 0
no. o
95. 0
105. 0
Or dnanc e
Per s onnel - - - - - - - - - - - - - - Tr ans por t at i on of t hi ngs
Equi pment - - - - - - - - - - - - - - Tot al - - - - - - - - - - - - - I ndex - - - - - - - - - - - - - - - -
100. 0
200. 0
400. 0
700. 0
100. 0
110. 0
95. 0
105. 0
—
102. 9
3, 400. 0
100
105. 3
Tot al by ac t i v i t y
I ndex - - - - - - - - - - - -
550. 0
95. 0
1, 050. 0
1, 695. 0
105. 9
440. 0
95. 0
630. 0
1 , 165. 0
105. 9
110. 0
190. 0
420. 0
720. 0
—
3, 580. 0
16 6
br eaks t he ac t i vi t y gr oupi ng of Ar my pr oc ur ement of equi pment and mi ssi l es
i nt o t he gr oupi ngs compar abl e t o publ i shed l evel s as shown i n Exhi bi t
Unpubl i shed det ai l
det ai l .
i s used t o br eak t hese down t o f i ner l evel s of
The Communi cat i ons and El ect r oni cs Equi pment
i nst ance,
( C&E) Gr oup,
f or
i s subdi vi ded i nt o el even commodi t y gr oupi ngs ( shown i n
Exhi bi t VI 1- 4) , whi c h account s f or al l
Pr ogr am.
VI I - 3.
but $10, 768 mi l l i on of t he C&E
The mor e i mpor t ant cat egor i es wer e f ur t her anal yzed,
of t he most
i mpor t ant
i t ems under each ar e pr esent ed,
such as
and l i st s
var i ous
t ypes of r adi os or model s of dat a pr ocessi ng equi pment under Pr ocur ement .
Si mi l ar br eakdowns ar e avai l abl e f or mi ssi l es and ot her act i vi t i es.
Much det ai l
i s av ai l abl e,
Oper at i ons and Mai nt enance;
Const r uct i on;
al so,
f or ot her maj or gr oups,
Resear ch,
Devel opment ,
such as
Test and Eval uat i on;
and Mi l i t ar y Per sonnel .
The basi c st r uct ur e of t he r epor t
t han obj ect cl ass,
but t he det ai l
i s t he ac t i vi t i es br eakdown r at her
pr ovi ded seems t o be evi dence t hat
wei ght i ng and sampl i ng can al so be done by commodi t y gr oupi ngs wi t hi n
ac t i vi t i es or pr ogr ams.
I t may be t hat t he obj ect cl asses t hemsel ves
can be br oken down si mi l ar l y,
cat egor i es,
es peci al l y i n t he Oper at i ons and Mai nt enance
wher e dat a ar e l i kel y t o be av ai l abl e f r om bot h t he Def ense
Suppl y Agency and t he Gener al
Ser vi ces Admi ni st r at i on.
I n any event ,
t he basi s of a wei ght i ng st r uct ur e and sampl i ng f r ame exi st s.
Ther e ar e some l i mi t at i ons of t he budget dat a f or t hese pur poses,
but t hey appear t o be s ur mount abl e:
( 1)
pr ogr am det ai l .
What appear s t o be commodi t y det ai l
For exampl e,
" ai r cr af t "
may act ual l y be
i ncl udes communi cat i on equi pment
167
EXHI BI T VI I - 3
FY 1972 PROCUREMENT OF EQUI PMENT AND MI SSI LES ( PEMA) - ARMY PROGRAM
Val ue
Mi l l i ons of dol l ar s
Ai r cr af t
-------------------------------
Ai r cr af t Spar es and Repai r Par t s - - - - - -
$
112. 4
12 .0
Mi ssi l es - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
1, 032. 8
Mi ssi l e Spar es and Repai r Par t s - - - - - - -
68. 3
Weapons and Combat Vehi cl es - - - - - - - - - - -
204. 6
Tact i cal
and Suppor t Vehi cl es - - - - - - - - -
255. 4
Communi cat i on and El ect r oni cs Equi pment
171. 9
Ot her Suppor t
142. 9
Equi pment
...............
Ammuni t i on- - - - - - - - - - - - - - - - - - - - - - - - - - - - - -- - - - - - - - - - - - - -
254. 0
----------------------
$3, 819. 3
Pr oduct i on Base Suppor t
Tot al
Sour ce:
1, 566. 0
Lynch, John E. , and J. St ephen Tur et t , " Mi l i t ar y Pr i ce I ndi ces, FY 1973
Ar my Budget , " Of f i ce of t he As s i st ant Di r ect or of Ar my Budget f or Resour ces,
Oc t ober 1971, pages 26 and 28.
16 8
EXHI BI T VI 1- 4
SUMMARY OF COMMUNI CATI ONS AND ELECTRONI CS EQUI PMENT BY COST
GROWTH CATEGORY, FY 1972
_______________ Cat egor y____________________
Val ue
Mi l l i ons of dol l ar s
Radi os, Tel ecommuni cat i ons and ot her Maj or
C&E Equi pment - - - - - - - - - - - - - - - - - - - - - - - - - - -
$ 83. 467
El ect r oni c Component s and Ac cessor i es - - - -
17. 083
Maj or COMSEC Equi pment
-------------------
ADP Equi pment - - - - - - - - - - - - - - - - - - - - - - - - - - - - Swi t c hi ng Equi pment
Test
Equi pment
5. 000
24. 005
-----------------------
6. 447
----------------------------
8. 156
Ant ennae - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Modi f i cat i on of Equi pment
. 440
-----------------
3. 076
Power Suppl y Equi pment
--------------------
1. 958
Phot ogr aphi c Equi pment
--------------------
. 710
Ser vi ces - - - - - - - - - - - - -
7. 732
Fi r st - Dest i nat i on Tr anspor t at i on - - - - - - - - - -
3, 058
Cont r ac t or Techni cal
Tot al
Sour ce:
--------------------------
$161. 132
Lynch, John E. , and J. St ephen Tur et t , " Mi l i t ar y Pr i ce I ndi ces, FY 1973
Ar my Budget , " Of f i ce of t he As s i st ant Di r ec t or of Ar my Budget f or Resour ces
Oc t ober 1971, pages 26 and 28.
169
on ai r cr af t ,
and " c ommuni cat i on equi pment " r ef er s onl y t o gr ound
communi c at i on equi pment .
Wei ght s f or ai r cr af t ,
t hen,
cat i ons equi pment , woul d be used t o wei ght
i ncl udi ng t hei r el ect r oni c component s,
woul d be used onl y t o wei ght
( 2)
f und,
i ndust r i al
however ,
I nf or mat i on on cont r act awar ds wi l l
poses no pr obl em.
si t uat i on. — ^
Pr ovi ded t hi s i s known,
di sc l ose t he
i f i ncl usi ve of
some c ommuni
t he pr i ce dat a f or ai r cr af t
and t he wei ght s f or el ec t r oni cs
t he gr ound el ect r oni cs equi pment .
The budget moni es spent or obl i gat ed by t he st ock
f und and management
f und ar e used t o buy i t ems
ar e not ac t ual l y used i n t he gi ven year ' s appr opr i at i on.
sai d t hat
t hi s si t uat i on
whi c h
I t has been
some i t ems pur chased dur i ng t he Kor ean War wer e ( per haps ar e)
i ssued unt i l
r ecent l y.
To t he ex t ent t hi s condi t i on pr evai l s,
cur r ent
pr ogr ams ar e obt ai ni ng equi pment f r om t hese f unds at pr i ces t hat pr ev ai l ed
some t i me ago,
or at l east at pr i ces t hat do not necess ar i l y r ef l ec t cur r ent
mar k et pr i ce l evel s.
pr i ce,
however ,
The f unds do at t empt
t o appr oxi mat e a r eal i st i c
by char gi ng t he ser vi ces a " st andar d pr i ce f or a r epr es en
t at i ve quant i t y , " whi c h i s per i odi c al l y updat ed,
pl us a sur c har ge f or
i nvent or y l oss and cost of f i r s t - dest i nat i on t r anspor t at i on.
12/
Because awar ds f or communi c at i on equi pment and f or ot her aspect s of
ai r c r af t ar e separ at el y cont r act ed, t hi s separ at i on of pr ogr am val ues
may be made.
See " Mi l i t ar y Pr i me Cont r act s Awar ds by Ser vi ce Cat egor y
and Feder al Suppl y Cl as si f i cat i on, " Depar t ment of Def ense, OASD
( Compt r ol l er ) .
170
One al t er nat i v e has been t o i gnor e t hese r evol vi ng f unds al t oget her .
Anot her
i s t o pr i ce onl y what DOD pur chases f r om out s i de t he agency,
whet her by t he r evol vi ng f und or ot her par t s of ser vi ces,
i nt er nal
t r ansf er s- - bot h val ues and " admi ni st er ed pr i ces. "
and t o i gnor e
Thi s wi l l
be
di sc us sed f ur t her under t he per t i nent appr opr i at i ons sect i on.
( 3)
The use of obl i gat i ons r at her t han ex pendi t ur e
out l ays has been quest i oned.
Nor mal l y,
obl i gat i ons ar e pai d wi t hi n a
var yi ng number of mont hs f r om t he t i me t hey ar e i ncur r ed.
i nst ances,
But
i n some
a t i mi ng adj ust ment may be necessar y.
I n an i mpact st udy,
conduc t ed i n 1966,
t hat f or Mi l i t ar y Per sonnel
f or ex ampl e, — ^ i t was f ound
and f or Oper at i ons and Mai nt enance,
t her e
was " c onsi der abl e st abi l i t y i n t he per cent age di st r i but i ons of t he annual
di r ect obl i gat i ons among t he obj ect cl asses, " a smal l
car r y- ov er of
obl i gat ed bal ances (1 t o 2 per cent )
obl i gat i ons i n each
year ,
r el at i ve t o t ot al
and a r el at i vel y st abl e car r y- ov er of unpai d obl i gat i ons at t he end
of each year .
and Ci vi l
On t he ot her hand,
Mi l i t ar y Const r uct i on,
Fami l y Housi ng
Def ens e- - heavi l y i nf l uenced by const r uc t i on vol ume- - wer e f ound
t o behave er r at i cal l y i n r el at i on t o expendi t ur es and obl i gat i ons.
Pr ocur ement ,
al so,
t i me- phasi ng was needed.
For
Thi s r anged f r om 2 year s
f or spec i al i zed suppor t vehi cl es t o 4 and 5 year s f or some shi ps.
The
adj ust ment
however ,
pr obl em may not be so sever e as t hese f i gur es i ndi cat e,
because obl i gat i ons ar e not al ways i ncur r ed t hi s f ar i n advance.
11/
" Met hodol ogy f or I ndust r y I mpact Anal ysi s, " Vol ume I , Met hodol oqy
and Summar y Resul t s, " RAC- TP- 190, Resear ch Anal ys i s Cor por at i on!
Mar ch 1966.
171
The key i ssue her e i s whet her t he pr i ces r ef er t o t he same t i me
per i od as t he expendi t ur es.
Thi s mat t er has been t r eat ed i n Chapt er
I n most
Pr i ci ng i n Gener al .
i nst ances t he use of obl i gat i ons wi l l
III,
be
sat i sf ac t or y f or wei ght i ng pur poses and f or gui des t o sampl e sel ect i on.
I f obl i gat i ons on a pr oduct cl ass bas i s , r at her t han a pr oj ect basi s,
ar e used,
i t seems even mor e l i kel y t hat t he dat a wi l l
Even t hough a l ar ge pr oj ect may t ake sever al
be s at i s f ac t or y .
year s t o compl et e,
t he cl ass
of i t ems pur chased y ear - by - y ear may r emai n r el at i vel y st abl e i n pr opor t i on,
al t hough t he pr oj ect s may var y.
t est ed,
Thi s i s an assumpt i on t hat
shoul d be
however .
Exhi bi t VI 1- 5 shows how,
on t he aver age,
t ot al
obl i gat i onal
aut hor i t y
( TOA) amount s ar e spr ead.
c.
Fr equency of Wei ght
Change
The f r equenc y wi t h whi ch wei ght s ar e r evi sed must
det er mi ned on t he basi s of ex per i enc e.
For t he Paasche i ndex f or m
at t empt s shoul d be made t o devel op an annual
wi l l
r equi r e new wei ght s annual l y.
changes ar e r equi r ed.
each obl i gat i onal
A st udy of
i ndex.
l ess f r equent
t he hi st or y of t he r el at i ve val ues i n
an opt i mum t i me per i od
dur i ng whi c h wei ght changes may be unnecessar y.
Or ,
i f a maj or st r uct ur al
a wei ght change can be pl anned i n advance.
The deci si on t o change i s l ess subj ect
t o j udgment
By def i ni t i on t hi s
For t he Laspeyr es f or m,
cl as si f i cat i on shoul d r eveal
change can be ant i ci pat ed,
be
t o mat hemat i cal
f or mul at i on t han
r el at i ng t o t he degr ee t o whi c h r el at i ve expendi t ur es can
change wi t hout cal l i ng f or r ewei ght i ng t he i ndex.
gui del i nes mi ght
be set f or t h,
however .
Some mat hemat i cal
EXHI BI T VI 1- 5
ESTI MATED EXPENDI TURE RATES FOR A GI VEN YEAR' S TOTAL OBLI GATI ONAL
AUTHORI TY ( as a per cent of t hat year ' s TOA)
Appr opr i at i on
PEMA ( ot her t han ammo) - RDTE, Ar my - - - - - - - - - - - - - MCA . . . . . . . . . . . . . . . . . . . . .
MC, R - - - - - - - - - - - - - - - - MCA, N G . . . . . . . . . . . . . . . .
Shi pbui l di ng, Conver si on,
Na v y - - - - - - - - - - - - - - - - - -
1st Yr .
2nd Yr .
3r d Yr .
4t h Yr .
5t h Yr .
16. 0
51. 0
10. 0
5. 0
1. 0
44. 0
38. 0
50. 0
51. 0
34. 0
28. 0
7. 5
25. 0
29. 0
45. 0
9. 0
2. 1
10. 0
8. 0
14. 4
3 0
1. 4
5. 0
7 0
5. 6
9. 0
20. 0
21. 0
18. 0
32. 0*
TOA - Tot al Obl i gat i onal Aut hor i t y
PEMA - Pr oc ur ement of Equi pment and Mi ssi l es, Ar my
ROTE - Resear ch, Devel opment , Task and Eval uat i on
MCA - Mi l i t ar y Const r uct i on, Ar my
MC, R - Mi l i t ar y Const r uct i on, Reser ves
MCA, NG - Mi l i t ar y Const r uct i on, Ar my Nat i onal Guar d
POM - Pr ogr am Obj ect i ve Memor andum
*
Af t er 4t h y ear
Sour ce:
Compt r ol l er of t he Ar my; shown i n " I nf l at i on/ Pr i ce Escal at i on I nst r uct i ons
f or USAWECOM Cost Est i mat i ng, " HQ U. S. Ar my Weapons Command, Rock I sl and,
I l l i noi s; Cost Anal ys i s Di vi si on ( AMSWE- CPD) , Apr i l 1971; and memor andum
f or Secr et ar i es of Mi l i t ar y Depar t ment s, Subj ect :
Gui dance f or P. O. M
Pr epar at i on, Apr i l 1973.
173
The compar i son of t he base and new const ant - dol l ar r el at i ve val ues
ar e i mpor t ant i n deci di ng whet her t o r evi se wei ght s.
The cur r ent - dol l ar
r el at i ve val ues i n t he t wo per i ods may di f f er ( because of di f f er ent i al
pr i ce movement s) wi t hout cal l i ng f or a wei ght r evi si on.
t het i cal
Consi der a hypo
si t uat i on:
Year 1
Pr oduct
Year 0______
Per cent
Val ue
Pr i ce
Repr i ced
r el at i ve Yr . O
Val ue
Per cent
Per cent
CASE: 1
A
B
$1, 000
500
$1, 500
. 60
1. 20
—
66. 7
33. 3
100. 0
600
600
,
$1 200’
$
50. 0
50. 0
T OO'
$
800
800
$1 T O
50. 0
50. 0
T OO
50. 0
50. 0
T OO
$1 , 000
500
$T , 500
66. 7
33. 3
100. 0
CASE: 2
A
B
$1, 000
500
$1, 500
. 60
1. 20
—
66. 7
33. 3
100. 0
I n Case 1 t he act ual
600
600
$T , 200
$
val ues of " A" and " B" have changed r el at i vel y
f r om 2: 1 t o 1: 1, but t he pr i ce- adj ust ed quant i t i es have not .
t he val ues have r emai ned i n t he same pr opor t i ons,
quant i t i es have changed.
I n Case 2
but t he pr i ce adj ust ed
Cont r ar y t o what a casual
assessment woul d
i ndi cat e, Case 2 woul d be a candi dat e f or a wei ght r evi si on but Case 1
woul d no^.
I t i s, of cour se,
not suf f i ci ent t o anal yze t he change i n
t he r el at i ve i mpor t ance of t he budget val ues f or maj or cat egor i es onl y.
Appar ent st abi l i t y at t hese l evel s may mask r el at i ve changes at f i ner
l evel s of det ai l .
174
C.
Samp! i nq
I t i s r ar el y possi bl e t o obt ai n pr i ce dat a f or ever y t ype of
or ser vi ce t o be r epr esent ed i n a pr i ce i ndex,
I nst ead,
i t ems , of cour se,
ndex
The goal
or sampl e,
of
of obt ai ni ng dat a and t he er r or al l owabl e i n t he r esul t i ng
keepi ng bot h as l ow as possi bl e.
ac cur acy obt ai ned.
ef f or t
much money must
I n shor t ,
( cost )
t he quest i on i s
i s wor t h t he i mpr ovement
Somet i mes t he quest i on i s posed:
ac company a gi ven ex pendi t ur e?"
amount
of t he sel ect i on,
i s t o obt ai n a r easonabl e bal ance bet ween t he ef f or t ,
whet her a gi ven or addi t i onal
wi l l
nor i s t hi s necessar y.
a j udi ci ous sel ect i on of pr oduct s s uf f i c es , pr ovi ded t hat a
mar gi n of er r or i s accept abl e.
or cost ,
pr oduct
in
" How much er r or
Somet i mes t he quest i on i s:
" How
be ex pended t o assur e an er r or of no mor e t han a gi ven
( per cent ) ?"
I n ei t her case,
t he answer
i s det er mi ned by av ai l abl e
Al l
r esour ces,
pol i cy or t he pr i or i t y pl aced on t he st udy.
ar e j udgment al
quest i ons,
t he answer s t o whi c h shoul d be sought r at i onal l y but not
mat hemat i cal l y.
When t hese quest i ons have been ans wer ed— at l east
t echni ques of sampl i ng can be br ought
i nt o pl ay.
t ent at i v el y— t he
Thi s r epor t cannot
under t ake a descr i pt i on of t he many aspect s of sci ent i f i c ( mat hemat i cal )
sampl i ng.
Many t ext books ar e av ai l abl e on t he subj ect ,
and DOD empl oys
per sons ski l l ed i n t hi s f i el d.
Thi s sect i on desc r i bes some appl i cat i ons of mat hemat i cal
sampl i ng
as t hey ar e appl i ed t o pr i ce i ndexes.
I t al so di scusses t he poss i bi l i t y
of obt ai ni ng r eas onabl y sound i ndexes,
based on a sampl e chosen on t he
basi s of ex per i enced j udgment .
175
Sampl i ng may come i nt o t he pi ct ur e at sever al
l evel s of a pr i ce
i ndex i n connec t i on wi t h bot h t he wei ght i ng st r uct ur e and t he pr i ce ser i es.
I n BLS' s Consumer Pr i ce I ndex,
f or exampl e,
t he wei ght s ar e t he ex pendi t ur es
of a def i ned gr oup of consumer s at a gi ven t i me f or a " mar ket basket " of
goods and ser vi ces.
The t ask of wei ght
der i vat i on f or t he CPI
I n nei t her t he BLS Whol es al e
sampl i ng ci t i es and f ami l i es wi t hi n ci t i es.
Pr i ce I ndex,
i nvol ves
nor i n t he Mi l i t ar y Pr i ce I ndex,
woul d a sampl e of wei ght s
be necess ar y because i n t he f or mer t he wei ght s ar e based on compr ehens i v e
Census f i gur es and i n t he l at t er on budget
The Mi l i t ar y Pr i ce I ndex Pr ogr am,
t ot al s.
as i t devel ops,
wi l l
wi t h sampl i ng as t hi s af f ect s t he pr i ce ser i es t hemsel ves.
connect ed wi t h ot her i ndexes shoul d be of
i nt er est ,
be conc er ned
Exper i ence
t hough not necess ar i l y
cont r ol l i ng.
Ther e ar e sever al
l evel s at whi c h sampl es ar e dr awn, dependi ng on
t he par t i c ul ar i ndex and i t s goal s:
( 1) sampl es of goods and ser vi ces;
( 2) sampl es of spec i f i c at i ons — det ai l ed desc r i pt i ons of i t ems ( see
sect i on on speci f i cat i ons) ;
( 3) sampl es of r epor t er s ( e. g. ,
( 4)
sel l er s or cont r act or s) ;
i n some cases sampl es of geogr aphi c r egi on,
i ncome cl ass or ot her
char act er i st i cs may be consi der ed.
I n t he CPI ,
pr oduct
l evel .
sci ent i f i c sampl i ng has been used succes sf ul l y at t he
The number of pr oduct s wi t h t hei r val ues,
or gani zabl e
i nt o ec onomi c al l y r el at ed expendi t ur e cl asses ar e suf f i ci ent ,
mat hemat i cal
so t hat
sampl i ng wi t h i t s pr obabi l i t y assumpt i ons can oper at e.
In
176
essence,
t he val ues ar e r anked f r om gr eat est t o l east , wi t hi n cl asses,
and uni f or m dol l ar - i nt er val s ar e deci ded upon,
i t ems t o be chosen.
poi nt ,
Then,
st ar t i ng wi t h a r andoml y chosen begi nni ng
i t ems t hat occur at each i nt er val
exceed t he i nt er val
based on t he number of
ar e, of cour se,
ar e sel ect ed.
Val ues t hat
chosen wi t h cer t ai nt y as par t of
t he pr ocess. — ^
The choi ce of t he number of i t ems t o be chosen i n each of t he expendi
t ur e cl asses depends on t he deci si on of t he pr i ci ng speci al i st s and i s
based not onl y on t he si ze ( dol l ar vol ume) of t he cl ass but al so a r ough
measur e of t he var i abi l i t y of pr i ce movement .
seasonal
movement s,
Pr oduct cl asses wi t h mar ked
such as f r ui t s and veget abl es, woul d be pr i ced mor e
i nt ensi vel y t han i t ems wi t h l ess f r equent movement s,
Pr obabi l i t y sampl i ng i s al so t he i ni t i al
but because of pr act i cal
di f f i cul t i es,
Sel ect i on of t he act ual
such as appl i ances.
t hr ust of out l et sampl i ng,
some modi f i cat i on becomes necessar y.
speci f i cat i on pr i ces,
however ,
i s not based
on pr obabi l i t y sampl i ng but on t he j udgment of speci al i st s who have
knowl edge of t he i t em.
They consi der among ot her t hi ngs t he i mpor t ance
and r epr esent at i veness of par t i cul ar qual i t i es and t he f easi bi l i t y of
descr i bi ng an i t em cl ear l y enough t o per mi t r epet i t i ve pr i ce col l ect i on.
The BLS i s cur r ent l y st udyi ng pr obabi l i t y sampl i ng f or t he Whol esal e
Pr i ce I ndex.
Agai n,
i t i s l i kel y t hat a vi abl e pr obabi l i t y sampl e,
14/ A descr i pt i on of t he sampl i ng pr ocedur e used i n t he CPI pr oduct sampl e
i s cont ai ned i n The Consumer Pr i ce I ndex: Hi st or y and Techni mi P«; .
Bul l et i n No. 1517, Bur eau of Labor St at i st i cs, U. S. Depar t ment of
Labor .
The pr ocedur e i s consi der abl y mor e compl ex t han t he f ew sent ences
above woul d i ndi cat e; met hods of est i mat i ng er r or by means of r epl i cat i on
ar e descr i bed as wel l as consi der abl e det ai l on pr ocedur e.
177
cover i ng t he ent i r e i ndex, wi l l
l evel
of t he pr oduct
be devel oped.
I f so,
i t wi l l
be at t he
( i n t hi s case 7- di gi t Census of Manuf act ur es and
Mi ner al s I ndust r i es codes or equi val ent ) .
Sampl es of r epor t er s wi l l
doubt l ess cont i nue t o be chosen l ar gel y f r om t r ade associ at i on l i st s or
si mi l ar sour ces,
and det ai l ed speci f i c at i ons wi l l
cont i nue t o be devel oped
f r om t he knowl edge of BLS commodi t y speci al i st s and i ndust r y r epr esent at i ves.
The smal l
number of manuf act ur er s of some pr oduct s and t he need t o pr epar e
pr i ce speci f i c at i ons,
compar abl e over t i me, mi l i t at e agai nst
devel opment of a pr obabi l i t y sampl i ng at t hese l evel s.
sampl i ng i s now used,
however ,
t he i mmedi at e
Pr obabi l i t y
f or sel ect i ng r epor t er s f or mobi l e homes,
I t may be i nst i t ut ed f or r ef i ned
some paper and wood pul p pr oduct s.
pet r ol eum pr oduct s.
1.
Judgment
i n Sampl i ng
I t i s not possi bl e t o di vi de t he subj ect of sampl i ng i nt o t wo
mut ual l y excl us i v e cat egor i es- - mat hemat i cal
sci ent i f i c and t he l at t er j udgment al .
cal l s f or a hi gh degr ee of j udgment
Obvi ousl y,
t he f or mer
pr obabi l i t y sampl i ng
i n det er mi ni ng t he scope of t he
uni ver se t o be sampl ed and t he st r at a,
Judgment
and pr obabi l i t y,
t he t ype of dat a t o be used,
et c.
has been r emoved f r om t he l i mi t ed t ask of ac t ual l y sel ect i ng
wi t hi n desc r i bed set s of dat a.
Wher e sc i ent i f i c sampl i ng has not been appl i ed,
been f ound usef ul .
One met hod r equi r es l i st i ng al l
cl ass by descendi ng or der of val ue.
t he t op of t he l i st ,
unt i l
pr oduct s wi t hi n a
The pr oduct s ar e t hen pr i ced f r om
t he val ue of
pr edet er mi ned per cent age of t ot al
ot her devi ces have
sel ect ed pr oduct s equal s some
val ue ( say 50 per cent ) .
Thi s met hod
178
was used i n t he R&D pur chase pr i ce i ndex ci t ed ear l i er .
The I ndust r i al
Sect or Pr i ce I ndex pr ogr am has devel oped an
Adequat e cover age of a
i nt er est i ng modi f i cat i on of t hi s pr ocedur e.
4- di gi t
( St andar d I ndust r i al
Cl assi f i cat i on)
i ndust r y i s pr esumed,
pr oduct cl asses " cover ed" wi t hi n t he i ndust r y account
i ndust r y val ue.
if
f or 90 per cent of
The pr oduct cl asses t hemsel ves ar e deemed cover ed,
50 per c ent of t he pr oduct val ues ar e pr i ced.
cover age as l ow as 40 per cent ,
40 or 50 per cent
if
Whi l e t hi s coul d mean a
i t i s consi der ed bet t er t han a st r ai ght
sampl e because t he met hod assur es a spr ead among pr oduct
cl asses and gener al l y f or ces a hi gher cover age t han 40 or 50 per cent .
I n t he WPI
i n addi t i on t o t he at t empt
t her e i s an ef f or t
pr oduct
i ndex, "
t o at t ai n r ough equal i t y of
i . e. ,
t o assur e t hat
number of pr i ced i t ems,
i ndex.
An at t empt
i s equal
" dol l ar s car r i ed by each
pr oduct - cl ass val ue,
di vi ded by
or subs t ant i al l y so t hr oughout
t he
i s al so made t o obt ai n a r el at i vel y gr eat er number of
pr i ces f r om i t ems wi t h seasonal
and f r om t hose subj ect
2-
t o i ncl ude l ar ge val ues,
or ot her wi s e vol at i l e pr i ce movement s
t o f r equent
pr i ce change.
Mi l i t ar y Pr i ce Sampl e
I t i s possi bl e t hat a pr obabi l i t y sampl e can be est abl i shed
f or t he mi l i t ar y pr i ce i ndex pr oj ect .
I f so,
i t wi l l
pr ove f easi bl e as a means of sel ect i ng pr oduct s,
cont r act or s,
r egi ons, or speci f i cat i ons.
pr obabl y at f i r st
r at her t han par t i cul ar
As st at ed ear l i er ,
pr i ce movement s
of unpr i c ed i t ems ar e mor e l i kel y t o move wi t h si mi l ar l y pr i ced i t ems
t han wi t h t hose i n t he same f unct i onal
seem pr udent
t o c onc ent r at e i ni t i al
cat egor y.
I t woul d t her ef or e
ef f or t s on es t abl i s hi ng a sampl i ng
179
f r ame,
based on a pr oduct or " obj ect "
( See Exhi bi t VI I - 6) .
act i vi t y cl assi f i cat i on.
t est s of sever al
be hel pf ul
cat egor y t han on a pr ogr am or
I f r esour ces per mi t ,
sampl i ng pr ocedur es and cl assi f i cat i on schemes woul d
i n maki ng t he " f i nal "
deci si on as wel l
as i n det er mi ni ng t he
st r at i f i cat i on necessar y.
The desi r abi l i t y of devel opi ng a sci ent i f i c sampl e har dl y needs t o
be ar gued.
But
i f t hese ef f or t s shoul d f ai l ,
need not be abandoned.
above,
D.
or be l ong del ayed,
Var i ous ot her met hods,
pr i ci ng
such as t hose descr i bed
ar e av ai l abl e and shoul d be used.
St r uct ur e
The gr eat er t he number of ways a syst em of
t he mor e usef ul
i t wi l l
be.
pr i ce i ndexes i s pr esent ed,
The sect i on on wei ght s t ouched on t hi s br i ef l y.
The obvi ous i ndex st r uct ur es ar e t hose t hat conf or m t o t he budget cat egor i es,
f or t hese cl as si f i cat i ons pr oduce a gr eat number of quest i ons concer ni ng
pr i ce movement s.
ser vi ce,
The i ndexes shoul d be set up t o show,
t he pr i ce movement s by budget
oper at i on and mai nt enanc e,
pr ocur ement ,
act i vi t i es ( st r at egi c f or ces,
t i ons,
et c. )
and by obj ect
gener al
( t r avel ,
Some modi f i cat i ons mi ght
al l
br eakdowns:
et c.
f or ces,
suppl i es,
by br anch of
mi l i t ar y per sonnel ,
Each shoul d be shown by
i nt el l i gence and c ommuni c a
equi pment ,
be t o combi ne t he per sonnel
et c. ) .
i ndexes f r om
cat egor i es so t hat a manpower pr i ce i ndex and a pr oduct
be shown,
Feder al
per haps by ser vi ce.
Agai n,
i ndex woul d
commodi t i es mi ght be gr ouped by
Suppl y Code and combi ned i nt o St andar d I ndust r i al
Cl as si f i cat i on
cat egor i es t o f aci l i t at e compar i son wi t h r oughl y compar abl e pr i ce i ndexes
f or t he pr i vat e economy.
Fur t her ,
at l east
some mi l i t ar y pr i ce i ndexes
E X H IB I T V I I -6 --S U M M A R Y OF P R IC IN G RECOMMENDATIONS
C om pared w it h
O b je c t
C la s s
P ercen t
T ota l
of
N a t io n a l A c co u n ts
D e fla to r s
A s s u m p t io n B e h in d
O b li-
g â tio n s
1 /
N a t io n a l A c c o u n ts
D e fla to r
R e co m m e n d e d DCD D e f l a t o r
(T h is
P erson n el
c o m p e n s a tio n
3 1 .9
E xpense
per p erson ^
W age o r
0 .9
E xpen se
per person ^ '
P r ic e
5 .3
E xpen se
per
person ^ '
P r ic e
5 .0
E xpense
per
person ^ '
c iv ilia n
use
P erson n el b e n e fits —
m ilita r y
use
fo r
fo r m e r
s a la r y
tra n sp orts-
1 .6
C P I:
t io n — person s
T r a n s p o r ta tio n
and
of
2 .7
c o m m u n ic a t io n s ,
oth er
person n el
or
or
O u tp u t e q u a te d
to
person s
O u tp u t e q u a te d
to
p erson s
G as,
te le p h o n e
P r ic e
DOD
ty p ic a l
fr e ig h t
P r ic e
ty p ic a l
of
W PI:
2 1 .2
O u tp u t e q u a te d
ra tes
to
DOD p r i c e
as
ra tes
to
care,
and m a t e r ia ls
1 2 .2
W P I:
and
m ed-
P r ic e
an d
to
as
as
s p e c ifie d
s e r v ic e s
as
P r ic e
s p e c ifie d
DOD
16 .3
W P I:
M o s tly t r a n s p o r t s -
t io n
e q u ip m e n t,
ery,
c h e m ic a ls , m e t a ls ,
P r ic e
m a c h in
as
s p e c ifie d
DOD
p u rch a se— a d ju s t
ch an ge
as
sa m e
v a lu e
p u ts
e x p e r ie n c e
sam e
p u ts
e x p e r ie n c e
of
DOD i n
o u tp u t
m an -h o u r s
o u tp u t
v a lu e
of
to
v a lu e
e q u a te d
D e fla te d
DOD i n
o u tp u t
to
e q u a te d
D e fla te d
econ on y
p r iv a te ;
of
to
v a lu e
e q u a te d
DOD i n
ou tp u ts
DOD i n
o u tp u ts
of
to
DOD i n
o u tp u ts
sa m e
no p rodu c
ch an ge
e x p e r ie n c e
sam e
D e fla te d
r e t a il
p u ts
e x p e r ie n c e
sa m e
p u ts
e x p e r ie n c e
sa m e
p u ts
v a lu e
e q u a te d
D e fla te d
in d u s tr ia l
orders
v a lu e
e q u a te d
D e fla te d
in d u s tr ia l
DOD p r i c e
fo r
D e fla te d
of
to
e q u a te d
H ig h e r p a i d
r e t a il
DOD p r i c e
p u rch ase
E q u ip m e n t
e x p e r ie n c e
tota l
DOD p r i c e
DOD
sam e
o u tp u t
e q u a te d
D e fla te d
p u ts
DOD p r i c e
oth er
v a r io u s
p erson s
e x p e r ie n c e
DOD p r i c e
r e a d in g
p erson s
r e t a il
DOD p r i c e
DOD
a u to r e p a i r ,
ic a l
r e c r e a tio n
to
O
m an -h o u r s
v a lu e
e q u a l m ore
n e w s p r in t
C P I:
to
p u ts
tiv ity
s e r v ic e s
D e fla te d
ra te
e le c tr ic ,
ra tes
O u tp u t e q u a te d
as
S u p p lie s
H ig h e r p a i d
p u ts
in c o m e w it h
s a la r y
DOD
C P I:
0.1
an d r e p r o d u c
tio n
O th e r
CO
c o m p e n s a tio n
p r e s e n t v a lu e
or
s e r v ic e s
iC C -a v e r a g e
1.5
u tilitie s
P r in t in g
(O u tp u t)
T h is R e p o r t
c o m p e n s a tio n
DOD e x p e n d i t u r e
D e fla te
ra tes
R e n t,
ra te
p erson n el
r e tir e m e n t
T r a n s p o r ta tio n
V a lu e
R e p ort)
DOD e x p e n d i t u r e
w age
T r a v e l an d
D e fla te d
N a tio n a l A c c o u n ts
e q u a l m ore
P erson n el b e n e fits —
B e n e fits
D e fla to r
v a lu e
e q u a te d
of
to
DOD i n
ou tp u ts
of
to
DOD i n
ou tp u ts
of
to
DOD i n
o u tp u ts
p e tr o le u m
Lands
and
stru ctu re s
1 .2
C en su s:
in g ;
New f a m i l y
v a r io u s
m a t e r ia l
h ou s-
P r ic e
co n s tr u c tio n
in
in d e x e s
sta n d a rd
p la c e — o r
(C e n su s)
stru ctu re
DOD p r i c e
h e d o n ic
m eth od
e x p e r ie n c e
as
p r iv a te
and
no
p r o d u c tiv ity
(in
sa m e
D e fla te d
p a rt)
ch an ge
in
p u ts
v a lu e
e q u a te d
of
to
DOD i n
ou tp u ts
b u ild in g
G ra n ts, s u b s id ie s ,
c o n tr ib u tio n s
2/
In su ra n ce
1/
c la im s
an d
in d e m n itie s
In terest
0.1
s/
1/
and d iv id e n d s
U n vou ch ered
C hange
in
s e le c te d
re-
sou rces
TOTAL
1 0 0 .0
____________________________________
7j
2/
------------------ o
----- a n u
L ess
0 .5
th a n
I m p lie d
NOTE:
fro m
iw n a g o r a o m ,
iu n a s ,
r i
i y (* •
p ercen t.
use
o f
R e c o m m e n d a tio n
S ee E x h ib it s
is
"m a n p o w e r s t r e n g t h s "
to
V II-2 ,
p r ic e
V II-
7
by o b je c t
and
te x t
as
o u tp u t rreasu re.
c la s s
an d r e c o m b in e
on w e ig h t s
and
to
stru ctu re ,
f it
in
v a r io u s
th is
stru ctu re s:
ch a p ter.
o b je c t
c la s s ,
a c t iv it y ,
a p p r o p r ia tio n ,
bran ch
of
s e r v ic e ,
etc.
18 1
mi ght be combi ned i nt o WPI
of pr oduct s, mi l i t ar y vs.
t he nat i onal
cat egor i es f or compar i s on of sel ect gr oups
ci vi l i an.
Si mi l ar l y,
account s ( GNP and nat i onal
i ndexes c ons i s t ent wi t h
i ncome) ,
mi ght
be const r uct ed.
The maj or t hr ust woul d be t o sat i sf y r equi r ement s f or budget
and const ant dol l ar comput at i on,
wi t h ot her
pr i ce anal ysi s
i mpor t ant uses t aki ng second
pr i or i t y.
Exhi bi t VI I - 7 suggest s some of t he mor e i mpor t ant
t hat come t o mi nd.
wi l l
I f t hese i ndexes ar e const r uct ed,
have been l ai d f or a cot er i e of speci al
speci al
anal yses.
For exampl e,
cal c ul at i on of Per sonnel
vs.
al l
i ndex syst ems
t he gr oundwor k
i ndexes t o meet
Syst em " CM woul d per mi t a speci al
ot her by t he combi nat i on of al l
mai ni ng obj ect cl ass i ndexes f ol l owi ng t he obj ect cl ass
compensat i on. "
demands of
r e
per sonnel
The same r esul t shoul d f l ow f r om Syst em " D" .
The exi s t enc e of sophi st i cat ed dat a pr ocessi ng equi pment shoul d
make a var i et y of combi nat i ons qui c kl y av ai l abl e wi t h r el at i vel y mi ni mal
mar gi nal
cost out l ays.
cont r act or r epor t i ng,
The i ni t i al
speci f i c at i on wr i t i ng,
qual i t y change adj ust ment s,
i ndi vi dual
pr i ce ser i es.
mat er i al i ze,
necessar y.
however ,
deci si ons and act i on on
and ot her det ai l s i n connect i on wi t h t he
I f a var i et y of
i ndex st r uct ur es ar e t o
advanc e pl anni ng of t he codi ng st r uct ur e wi l l
The val ues,
" wei ght deck, " mus t
cost woul d i nvol ve chor es of sampl i ng,
whi c h wi l l
have been put
i n t he wei ght
f i l e or
be coded ac cor di ng t o t he var i ous syst ems shown i n
Exhi bi t VI I - 7 ( or al t er nat i v e syst ems f i nal l y devel oped) .
ser i es must
be
be si mi l ar l y coded.
I n addi t i on,
Each pr i ce
t he unpr i ced val ues ( whose
pr i ce movement s ar e i mput ed t o speci f i c pr i ced i t ems or gr oups of
i t ems)
18 2
EXHI BI T VI I - 7
SI X SUGGESTED SYSTEMS OF PRI CE I NDEXES
( NOTE:
For Tot al DOD and Separ at el y
f or Each Br anch of Ser vi ce)
Sy st em A. — By Appr opr i at i on and Obj ect
Tot al
DOD
Mi l i t ar y Per sonnel
Per sonnel
Tr avel &
Tr anspor t
j ^ gpl i es
compensat i on
t r anspor t at i on of per sons
at i on of t hi ngs
and mat er i al s
Oper at i on and Mai nt enanc e
Per sonnel compensat i on
Tr avel & t r anspor t at i on of per sons
Tr anspor t at i on of t hi ngs
Rent , communi cat i on, ut i l i t i es
Pr i nt i ng and r epr oduct i on
Ot her ser vi ces
Suppl i es and mat er i al s
Equi pment
Pr ocur ement
Tr anspor t at i on of t hi ngs
Ot her ser vi ces
Suppl i es and mat er i al s
Equi pment
Et c.
Resear ch,
Devel opment ,
Test and Eval uat i on
Resear ch compensat i on
Tr avel & t r anspor t at i on of per sons
Tr anspor t at i on of t hi ngs
Rent , communi cat i on and ut i l i t i es
Pr i nt i ng and r epr oduct i on
Ot her ser vi ces
Suppl i es and mat er i al s
Equi pment
Et c.
Cl ass
EXHI BI T V1 1- 7 ( cont i nued)
Mi l i t ar y Cons t r uc t i on
Per sonnel compensat i on
Tr avel & t r anspor t at i on of per sons
Tr anspor t at i on of t hi ngs
Rent , communi c at i on and ut i l i t i es
Pr i nt i ng and r epr oduc t i on
Ot her ser vi ces
Suppl i es and mat er i al s
Equi pment
Lands and st r uct ur es
Et c. ,
- Ot her Cat egor i es
Sy st em B. — By Ac t i vi t y and Obj ect Cl ass
Tot al
DOD
Mi l i t ar y Sci ences
Per sonnel compensat i on
Tr avel and t r anspor t at i on
Suppl i es and mat er i al s
Et c.
Ai r c r af t and Rel at ed Equi pment
Per sonnel compensat i on
Suppl i es and mat er i al s
Equi pment
Et c.
Mi ssi l es and Rel at ed Equi pment
( appr opr i at e obj ect - c l ass br eakdown)
Shi ps,
Smal l
Or dnance,
Cr af t and Rel at ed Equi pment
Combat Vehi cl es and Rel at ed Equi pment
Ot her Equi pment
Pr ogr amwi de Management
and Suppor t
184
EXHI BI T V11- 7 ( cont i nued)
Sy st em C. — By Obj ect Cl ass and Appr opr i at i on
Tot al
DOD
Per sonnel
Compensat i on
Mi l i t ar y per sonnel
Oper at i on and mai nt enanc e
Pr oc ur ement
Resear ch dev el opment t est and ev al uat i on
Mi l i t ar y cons t r uct i on
Equi pment
Oper at i on and mai nt enanc e
Pr oc ur ement
RDT&E
Mi l i t ar y cons t r uc t i on
Fami l y housi ng
Et c.
Sy st em D. —- By Obj ec t Cl ass and Act i vi t y
Tot al
DOD
Per sonnel
Compensat i on
Mi l i t ar y sci ences
Ai r c r af t and r el at ed
Mi ssi l es
Et c.
Equi pment
Mi l i t ar y sci ences
Ai r c r af t and r el at ed
Mi ssi l es
Et c.
185
EXHI BI T V1 1- 7 ( c ont i nued)
Sy st em E. - - By Appr opr i at i on and Act i vi t y
Tot al
POD
Mi l i t ar y Per sonnel
Mi l i t ar y sci ences
Ai r c r af t and r el at ed
Mi ssi l es, et c.
Et c.
Oper at i on and Mai nt enanc e
Mi l i t ar y sci ences
Ai r c r af t and r el at ed
Mi ssi l es, et c.
Et c.
Pr oc ur ement
Sy s t em F. — By Ac t i v i t y and Appr opr i at i on
Tot al
POD
Mi l i t ar y Sci ences
Mi l i t ar y per sonnel
Oper at i on and mai nt enanc e
Pr oc ur ement
Et c.
Ai r c r af t and Rel at ed
Mi l i t ar y per sonnel
Oper at i on and mai nt enanc e
Equi pment
RDT&E
Et c.
186
mus t
be i ndi vi dual l y coded so t hat t hese can be sc at t er ed ar ound as
needed among t he var i ous st r uct ur es.
These must al so be t i ed i n wi t h
t he pr i ce i ndex f or t he pr oduct assi gned t o t hem as a pr oxy.
Ther e may al so be speci al
t o mat ch t he i ndust r y st r uct ur e,
Cl assi f i cat i on,
i nt o pl ay.
I t may be necessar y
ad_ hoc r equi r ement s.
as set f or t h i n t he St andar d I ndust r i al
or t he I nt er nat i onal
Commodi t y Cl assi f i cat i on may come
I n l i eu of pr ov i di ng f or al l
t hese cont i ngenci es,
it
is
possi bl e t hat codi ng t he det ai l ed val ues i n t he wei ght di agr am or i n t he
pr i ce ser i es wi t h Feder al
Commodi t y Sy st em codes wi l l
can be r el at ed as needed t o t he St andar d I ndust r i al
suf f i ce.
These
Cl assi f i cat i on ( SI C)
and a conc or danc e can be devel oped bet ween t hi s and t he i nt er nat i onal
I f a separ at e sub- i ndex sy st em of pr i ce change f or i mpor t ed goods
codes.
i s desi r ed,
i t woul d be necess ar y t o spl i t
t he val ue wei ght s t o show t he
pur chases f r om abr oad and t o pr i ce t hose i t ems separ at el y.
A syst em of
codi ng of t hese pr oduct s woul d f aci l i t at e machi ne pr ocessi ng.
Ther e
al r eady exi st s a conc or danc e bet ween t he i mpor t - expor t codes of
Bur eau of t he Census and t he SI C,
I n summar y,
pur poses.
essar y,
a var i et y of
i f t hi s shoul d be r equi r ed. — ^
i ndex st r uct ur es ser ve usef ul
I n or der t o achi ev e such a var i et y,
i ncl udi ng car ef ul
t he
and essent i al
advanc e pl anni ng i s nec
at t ent i on t o t he codi ng st r uct ur e i n or der
t hat machi ne t echni ques can be appl i ed.
15/
Thi s concor dance, t oget her wi t h t he codi ng of many DOD pur chases t o
bot h FSC and SI C codes, shoul d f aci l i t at e r el at i ng t he wei ght i ng
syst ems and pr i ces t o one anot her .
187
E.
Mi l i t ar y Per s onnel — Ac t i v e and Ret i r ed
Thes e appr opr i at i ons cover
per sonnel ,
cadet s,
" pay and al l owances of of f i cer s,
and mi ds hi pmen;
t he subs i st ence of mi l i t ar y per sonnel ,
per manent change of st at i on t r avel ;
as wel l
nel
as t he mi l i t ar y r et i r ement
and ot her mi l i t ar y per sonnel
payment s.
pay const i t ut es anot her
5 per cent .
among t he " ot her mi l i t ar y per sonnel
and t r anspor t at i on,
budget ,
cost s"
cost ,
16/
The ac t i ve mi l i t ar y per s on
cat egor y const i t ut es near l y 30 per cent of di r ect
Ret i r ement
enl i st ed
obl i gat i ons of DOD.
The appr opr i at i on cover s
such nonpay i t ems as t r avel
suppl i es and mat er i al s.
I n t he 1972 f i scal
year
t hese ot her i t ems const i t ut ed l ess t han 10 per cent of t ot al
di r ect obl i gat i ons f or t he mi l i t ar y per sonnel
appr opr i at i on.
Si nce many pr obl ems encount er ed i n pr i ci ng bot h mi l i t ar y and ci vi l i an
per sonnel
ar e t he same,
bot h cat egor i es of empl oy ment compensat i on ar e
di scussed bel ow.
1.
Def i ni t i ons— A1t er nat i v e Measur es
As i ndi cat ed ear l i er ,
i ndex can be def i ned,
t her e ar e a number of ways a " pr i ce"
dependi ng on t he pur pose.
Thi s i s t r ue,
even i f
t he basi c def i ni t i on of pr i ce i s r et ai ned,
i . e. ,
def i ned uni t quant i t y of ser vi ce or good.
The quest i on of what
pur chased i s i nvol ved.
Speci f i cal l y,
a payment f or a gi ven
f or mi l i t ar y per sonnel ,
i s bei ng
does t he
pur chase consi s t of a def i ned amount and qual i t y of wor k at a par t i cul ar
l evel
of ski l l
sonnel
and r esponsi bi l i t y?
j ob desc r i pt i ons def i ne t he wor k?
t he t i me of a par t i cul ar t ype of
r equi r ement s ?
ski l l
16/
I f so, do t he j ob sheet s or ot her per
I f so,
Or i s t he empl oy er pur chasi ng
i ndi vi dual , who has met cer t ai n def i ned
per haps t he " pur chase"
shoul d be def i ned as t he
of a qual i f i ed chemi st wi t h PhD and t hr ee year s ex per i enc e— or a
Fi scal
Year 1974 Budget of t he U. S.
Gover nment .
188
per son wi t h 10 year s mi l i t ar y ex per i ence pl us a degr ee i n chemi st r y ( t o
wor k i n a r esear ch l abor at or y) ?
One appr oach st r esses t he j ob,
pr i ce consi st s of t he amount necess ar y t o f i l l
t he j ob.
and t he
The second
st r esses t he need f or cer t ai n t ypes of per sonnel .
Thi s choi ce was ment i oned i n passi ng i n Chapt er
s ubj ec t was di scussed dur i ng t he i ni t i al
One pr oposal
The
st ages of ef f or t s t o const r uct
an i ndex of ^ pur chas e pr i ces f or Ar my R&D l abor at or i es,
t r act or s.
III.
and t hei r c on
was t o meas ur e t he amount i t woul d cost t o
hi r e pr of essi onal s wi t h def i ned l evel s of exper i ence,
chemi st r y pl us t hr ee year s ex per i ence i n t he f i el d.
on t hi s basi s woul d have r i sen,
such as PhD i n
An i ndex const r uct ed
i f at an ear l i er t i me per sons wi t h t hese
qual i f i c at i ons coul d have been hi r ed at a l ower gr ade t han t hey coul d be
hi r ed t oday.
Thi s " pr i ce"
i ndex woul d have i gnor ed t he wage- s al ar y
st r uct ur e t o t hi s ext ent .
The ot her si de of t he di scus si on hel d t hat
j obs wi t h def i ni t e dut i es t o be per f or med.
Ther e ar e,
t her e ar e cer t ai n
i t i s t r ue,
def i ni t e cor r el at i ons bet ween t hese j ob descr i pt i ons and t he t r ai ni ng of
candi dat es;
t ask.
but
t he mai n t hr ust i s t o hi r e someone t o do t he r equi r ed
Thi s vi ew f avor s t he j ob sheet or some compar abl e desc r i pt i on as
t he key speci f i ed uni t of ser vi ce t o be pr i ced.
and i t seems- - up t o a poi nt — pr oper l y so.
essent i al
Exper i ment al
and
Fr om t he pur chaser ' s vi ew t he
cr i t er i on shoul d be t he per f or manc e ex pect ed per dol l ar ,
t han t he uni t of pot ent i al
\JJ
Thi s vi ew pr evai l ed,
r at her
i mpl i ed by t he ot her choi ce.
I nput Pr i ce I ndex,
Resear ch and Devel opment , "
op. cit.
18 9
2.
Basi c Pr i c i ng Uni t
The choi ce of t he j ob descr i pt i on as t he basi c appr oach t o
pr i c i ng— whet her of mi l i t ar y or ci vi l i an per s onnel — seems i n keepi ng wi t h
what
of
i s act ual l y bei ng pur chased.
t i me f r om t he empl oyee,
t er ms,
The empl oy er i s pur chasi ng an amount
speci f yi ng,
ei t her pr eci sel y or i n gener al
t he way i n whi c h t he t i me i s t o be used.
Whi l e i t may be t r ue
t hat t he j ob coul d not be done wi t hout cer t ai n t r ai ni ng, t hi s set s s pec i
f i cat i on f or t he j ob ( e. g. ,
of hi r i ng.
The act ual
GS- 12 economi st )
and det er mi nes t he condi t i on
bar gai n i s ov er t he t asks t o be done and t he r e
numer at i on.
Nei t her i s t he end pr oduc t — ser v i c e or goods — pur chased.
wage bar gai n i s not made i n t er ms of f i ni shed t yped manusc r i pt s,
ment s per f or med,
t i me,
or bat t l es won;
The
ex per i
t he wage bar gai n cover s hour s of t ypi st ' s
l abor at or y assi st ant ' s t i me,
or mont hl y pay of
ser geant s.
For t hese
r easons t he basi c pay j ob sheet s or equi val ent desc r i pt i on ar e r ecommended
as t he basi c pr i ci ng uni t .
Lo n g -r u n
3 .
M o d i fi c a t i o n s
The pur pose of usi ng a posi t i on desc r i pt i on or mi l i t ar y r ank
as t he uni t
i s t o assur e t hat each wage or sal ar y r el at es t o t he same
t ask ov er t i me.
I n t heor y and i n shor t - r un pr act i ce j ob descr i pt i ons
ser ve t hi s pur pose.
Ov er t he l ong- r un, however ,
of an " upwar d c r eep, " i . e. ,
was per f or med by per sonnel
t he
ex t ent
r ef l ect
t her e i s t he poss i bi l i t y
t he wor k now per f or med i n a desi gnat ed j ob
i n a l ower gr ade some year s i n t he past .
t hat t hi s i s t he si t uat i on,
To
t he t r ue pr i ce woul d have t o
t he per cent age r i se f r om t he l ower gr ade at r at es t hen pai d t o
t he hi gher gr ade at cur r ent
r at es.
The cor r ect
i ndex,
t hus, woul d have
r i sen becaus e of r ecl assi f i cat i ons of j obs upwar d, whi l e l eavi ng dut i es
190
unchanged and because of
of
t he r i si ng pay scal es t hemsel ves.
Compar i son
r at es i n t he same j ob sheet woul d i n t hi s ev ent r esul t i n an under
st at ed i ndex r i se.
That t hi s has i ndeed oc cur r ed ov er t he year s i n mi l i t ar y,
ci vi l i an,
gover nment ,
i s »ot known.
and pr i vat e sec t or j obs i s l i kel y,
Cl assi f i cat i on of f i ces i n t he agenci es and t he Ci vi l
Ser vi ce Commi ssi on t r y t o cont ai n t he upwar d shi f t ,
as pr onounc ed as commonl y t hought .
sat i sf ac t or y per sonnel
account .
but t he ex t ent
Per haps,
per sons devel opi ng a
pr i ce i ndex woul d have t o t ake t hi s t endency i nt o
spot checks of set s of sel ect ed j ob sheet s ov er a
per i od of year s woul d r eveal
be l i kel y t hat
Never t hel ess ,
so t hat i t may not be
t he magni t ude of any dr i f t ,
" desk audi t s" woul d be r equi r ed.
al t hough i t woul d
As a pr act i cal
mat t er
f or shor t - t i me meas ur ement t he t endency can pr oper l y be i gnor ed.
4.
St eps Wi t hi n Gr ade or Rank
How t o handl e t he " i n- gr ades" or st ep i ncr eases must be
det er mi ned.
One met hod woul d measur e t he per cent age i ncr ease i n pay
f r om t he mos t usual
st ep a y ear l at er .
( e. g. ,
modal )
st ep i n gr ade t o t he " most us ual "
Or t he aver age pay f or t he gr ade ( st ep r at es wei ght ed
wi t h number s empl oy ed or man- year s at each st ep) woul d be used y ear - t oyear .
Pr i ce change under t hi s met hod t r eat s bot h changes i n basi c r at es
and changes i n aver age pay wi t hi n gr ades as pr i ce change.
Anot her met hod consi st s of
( modal
per haps , or medi an)
i dent i f y i ng t he mos t
st ep i n each r ank or gr ade i n t he bas e- y ear
° r _ygl 9ht - bas e y ear and meas ur i ng pr i ce change f or a gr ade,
f or t hi s st ep.
t ypi cal
y ear - t o- y ear ,
The same wi t hi n- gr ade st ep woul d be mai nt ai ned,
became qui t e out - of - dat e or per haps unt i l
unt i l
it
a basi c l i nki ng adj ust ment or
191
gener al
wei ght
change was i nst i t ut ed.
Thi s deci si on r esul t s i n an i ndex
f or t he gr ade t hat moves as a r esul t of changes i n basi c r at es onl y.
An as sess ment of t he f act s of t he par t i c ul ar si t uat i on i s needed
t o ar r i ve at a choi ce bet ween t he t wo met hods.
pay component s of t he i ndexes,
The ci vi l i an and mi l i t ar y
pr epar ed by t he Of f i ce of As si st ant
Secr et ar y of Def ense ( Compt r ol l er )
( OASD- C) , meas ur e t he change f r om
a gi ven st ep one y ear t o t he same st ep t he next y ear ( t he second met hod
descr i bed above) .
t hi s t o say,
The BLS- NSF r epor t ,
however :
desc r i bed ear l i er ( NSF 70- 7) ,
has
" Admi ni s t r at i ve i ncr eases or i n- gr ade pr omot i ons
wer e consi der ed t o be pr i ce i ncr eases and not qual i t y changes.
appr oach was based on t he f act
Thi s
t hat no change i n j ob descr i pt i on occur s
when an empl oy ee qual i f i es f or an admi ni st r at i ve i ncr ease.
Gr ade changes,
on t he ot her hand, wer e t r eat ed as qual i t y or speci f i c at i on changes and,
t her ef or e,
wer e not
" The Feder al
consi der ed as pr i ce i nc r eas e or decr eases.
Sal ar y Ref or m Ac t r equi r es t hat an empl oy ee' s wor k
mus t show an ‘ accept abl e l evel
gr ade pr omot i on.
of compet ence*
i n or der t o mer i t
an i n
The poi nt coul d per haps be made t hat t hi s i ndi cat es a
qual i t y change and t hat i n- gr ade r ai ses shoul d not be al l owed t o move
t he i ndex.
I t was f ound,
however ,
hi ghl y ski l l ed pr of essi onal
i n t he 1964- 1965 r epor t s,
per sonnel
t hat some
wer e gi ven i n- gr ade i ncr eases of
mor e t han one st ep at a t i me i n or der t o r et ai n t hem— a pr ac t i ce whi c h
seems t o di sc ount
Thus,
t he qual i t y change t heor y. "
t he OASD( C)
and BLS- NSF st udi es come down on opposi t e si des,
r esul t of di f f er ence i n as sess ment of avai l abl e f act s,
18/
r at her t han of
" The Economi cs of Def ense Spendi ng— A Look at t he Real i t i es, "
Depar t ment of Def ense ( Compt r ol l er ) , Jul y 1972.
a
192
p h ilo s o p h y .
I f
to
h ir e
r e t a i n
s h o u ld
t i o n
o r
be
o f
th e
b y
i f
pay
5 .
th e
item s
th e se
"d en om in ated "
d e fl a t o r
r e la te d
19/
m ay
q u a l i t y
to
used
as
e xa m p le ),
then
th e y
th e
o th e r
t r u e — t h a t
then
t h i s
a
h a n d ,
th e
q u a l i t y
c r i t e r i o n ,
t r e a t
Su p p le m e n ts
D OD
t h a t
system
th e
above
to
a re
m i l i t a r y
to o ls
th e
assum p
e x tr a
pay
c h an g e,
i t
pay
r a th e r
w ou ld
one
is
even
w ay
be
and
to
p r o p o r tio n a l
to
s o c ia l
a t
t o t a l
to
b a s ic
s e c u r ity
A
sim p le
a u to m a tic a lly
th e
a r r i v e
Pa y
exam p le s.
w h ic h
am ounts
to
a re
c o n tr ib u tio n
p aym en ts,
tim in g
is
b e fo re
th e
cussed
below
o f
a ls o
in
a
f i r s t
b e n e fits
a vo id e d — i .e
a lo n g
d e ta i le d
as
c o m p u tatio n
b e n e fi t
W in e s to n e ,
2 8 9 ),
s e rve
changes
m ethod
A
i t ,
are
( FI C A )
m anner
change
p a y r o ll
and
c o n s ta n t-d o lla r s
s a la r y
o f
w ith
use
f o r
o r
the
t r e a t i n g
changes
th e
pay
o r
in
p a y -r a te
and
th o se
to
a llo w
ite m s .
th r e e "
19 i /
h o ld s
Un d e r
r a is e s
f o r
on
e xp e rie n c e —
paym en ts
as
add
d e s c rib e d
Th is
f o r
to
o r
j u s t i f y
r e tir e m e n t
is
s te p
I f ,
Ac t
i n d ic a te d .
are
Se r vic e
p a y ,
Re fo r m
B e n e fi t s ,
C i v i l
base
m inim um
in c r e a s e s .
s k i l l
fa c ts
Fr i n g e
Su c h
a d m in is tr a tiv e
o th e r .
Th e s e
w ages.
above
Sa la r y
is
th e
th a t
p r ic e
e x tr a
c h an ge,
c o n s i s t e n t ,
fo u n d
as
Fe d e r a l
p r ic e
c i v i l i a n
is
(h i r i n g
tr e a te d
accom panied
th an
i t
is
th e
d e s c r ip tio n
Re s e a r c h
.,
L .,
a p p ro xim a tio n
change
c i v i l i a n
Fo r
t h i s
o f
o th e r
ite m
Pr ic e
C o r p o r a tio n ,
is
reason
p erson n el
M i l i t a r y
from
b u t
m ade
an
c o sts
19 6 8 .
Th e
a
to
is
" h ig h -
q u e s tio n
num ber
a l t e r n a t i v e
" Re tir e d
In d e x"
Ju n e
f a i l s
" h i g h -fi v e "
r e ti r e m e n t ).
c o n tr ib u tio n
a p p r o p r ia tio n
"A
An a ly s is
( e .g .,
th e
r e c e ive d .
w ith
Ro b e rt
o f
w o rk in g
o f
ye a rs
is
d i s
M i l i t a r y
c o n ta in e d
(Su p p le m e n t
o f
to
P e r s o n n e l ."
in
RAC-TP-
193
Speci al
6.
Pay and Al l owances
Ot her suppl ement s ar e not pr opor t i onal
abl e t o al l
pay.
per sonnel ,
or do not change aut omat i cal l y wi t h change i n base
Among t hese i t ems ar e basi c al l owanc e f or quar t er s ( BAQ) , enl i st ed
subsi st ence,
pay.
t o pay or ar e not av ai l
enl i st ed cl ot hi ng,
t r avel
and t r anspor t at i on,
The val ue of t hose i t ems pur chased by gover nment
host i l e f i r e
shoul d be def l at ed
( t o t he ex t ent t hey ar e si gni f i c ant and wi t hi n t he pr i ci ng sampl e)
by
spec i al l y pr epar ed pr i ce i ndexes based on t he pr i ces of i t ems and s er v i c es ,
i f any,
pay)
pur chased by POD t o suppl y t hem.
Qu a l i t y
Ch a n g e
O r d i n a r i l y
s h e e ts ,
com paring
w ith
th e
tr u e
p ro vid e d
fr in g e
com parable
p r e s e n t,
re s p e c t
th is
to
jo b
q u a l i t y
o f
pay
th e
vo lu n ta r y
p erson n el
b y
e n lis tm e n t
p o s i t i o n s — p o l i t i c a l ,
s t r u c ti n g
a
p r ic e
o f
i f
because
v s .
n o t ,
be
s te p
to
o ve r
assu re
s u i t a b l e
in
o r
u n ive rs e
tim e ,
to g e th e r
in d e x .
th a t
Th is
the
e s p e c ia lly
p o in t
o f
th e
ra is e d
is
a
A t
form
and
q u e s tio n s
p e r io d — re p re s e n ts
are
m ade.
ac u te
d r a f t
o f
h o ld s
grades
a d ju stm e n t
su sp en sion
Th is
sam ple
w ith
th e
w h e th e r
c o n s ta n t
r a n k -b y -r a n k .
th e
o f
Vo lu n te e r
s h o u ld
M i l i t a r y
m eet
c o n s c r ip tio n
and
s o c i a l ,
i t
th e
adequate
a r is e n
th e
a m y .
and
an
a
has
o f
n a tio n
m eans
in d e x
grade
a d ju stm e n t
w ork
p r ic in g
check
q u e s tio n
th e
can
o f
p ro vid e
o r ,
th e
D r a ft
W hether
m i l i t a r y
w i l l
vo lu n te e r
m a n -y e a r s
Th e
each
p e r io d ic
p a r t i c u l a r
s h e e t - **d u r i n g
a .
a
M is sio n
p r a c tic e
f o r
ye a rs
m i l i t a r y
o f
pay
is
th e
and
th e
b e n e fi t s ,
th e re
o ve r
in tr o d u c tio n
th e
host i l e- f i r e
shoul d be t r eat ed as pay changes as t he pay per uni t changes.
7 .
jo b
Ot her i t ems ( e. g.
has
been
e c o n o m ic ,
seem s
w is e r
i t s
o r
and
to
needs
by
d eb ated
S e r v i c e .
(o r
d e s ir e s )
encouragem ent
from
m o r a l.
r e s t r i c t
a
Fo r
th e
v a r i e t y
f o r
o f
o f
purposes
d is c u s s io n
o f
to
c on
th e
194
e f f e c t
th e
c h a n g e -o ve r
th e
e ffe c tiv e n e s s
o f
are
im p o rta n t
even
c o n c e iva b le
u s e ,
m ore
e n l i s te d
th e
and
and
th e
p erson nel
o f
th e
a
h i s t o r i c a l l y
in
b e h a lf
up
w ith
th e
On c e
s i t u a t i o n
a
p r ic e
w ork
w ere
to
by
In
th e
some
sam e
a
in
burden
m i l i t a r y
th e
fo r c e
even
i f
Th is
k in d
D OD
o r
fo r c e d
s e r vic e
on
f o r
th e
f o r
e x tr a
w h e th e r
segm ent
10 -p a r t y
is
e n t i r e
a p p ly
b u y e r ,
o r
been
when
to
e ffe c t i v e n e s s .
are
has
f a i r
i t
th e
be
d e c is io n
p ric e s
in
can
m i l i t a r y
though
d ec rease
com parison
th e
even
b o th ,
th e
o f
o f
re a s o n s ,
o f
t h a t
e ffi c i e n c y
prom pted
as
som eth in g
c on c epts
h ave
fo r c e ,
h o w e ve r,
w h e th e r
w ould
w ork
m ade,
o f
betw een
resou rc e
th e
i s
g e n e ral
te le p h o n e
econom ic
e x p l o i t a t i o n .
pay
w hich
to
w ork
r i g h t .
m ade
such
assess
c o s t
th e
e x tr a
to
o th e r
w ith
as
be
the
i s ,
in
paym ent
s o lve d
segm ents
f a c t ,
m o d ific a tio n s
th e
re q u ire m e n t
accordance
th e
in
s u b s t i t u t i o n
t h a t
o f
was
in
o f
m ade
w en t
w o r k * e x t r a -q u a l i t y
o u g h t
to
e x t r a
in d e x .
a
o f
ap artm e n t
2 la n d -
20/
lo r d s
20 /
purchase
So m e
on
fo rc e d
lo w -s u lp h u r
fu e l
s u b s ti tu ti o n s
a u to m o b ile s ,
q .v .
o i l ,
m ay
be
d e sc rib e d
e a r l i e r .
b o r d e r l i n e ,
such
as
th e
on
c r i t e r i a
as
o f
m i l i t a r y
Oth e r
h ave
c o n s id e r a tio n s
s o c ia l
th e
own
o r
segm ents
b y
m is s io n .
w i l l
e n t i r e l y
c o u rs e .
paym ent
and
is
arm y,
f o r
had
I t
o f
o th e r
system
i t s
t h e i r
valu e s
th e
r e s t
a s c e r ta in
o r
in
re s p e c ts
p r o d u c t,
p a r ty
to
a
Pr o b le m s
o f
e lim in a te d
t r y
ac c om plish
hum an
o f
o f
d e c is io n
p e rfo rm e d ,
w ith
p o i n t ,
in c r e a s e ,
accom panied
th e
e lim in a tio n
th e
to
vo lu n te e r
to
shops
D OD
t h a t
and
mi l i t ar y
v o lu n ta r y
s h a rin g
d e c l i n e s — up
sw eat
a
c o n t r o l l i n g
p ro p e r
e q u ita b le
in c e p tio n
to
sm og
d e vic e
195
Le t
us
lo o k
a t
t i o n — is
b e n e fic ia l
p o in t
o f
vie w
I I I .
An o th e r
pay
is
to
o n ly
th e
m i l i t a r y
tw o
and
Th e r e
i s
a ls o
a
a rm y,
t r a d i t i o n a l
n a tio n
from
th e
fo rc e s
pay
in
p o in t
o f
b u t
a
to
Ch a p te r
r a is e
m i l i t a r y
and
c o ve re d
r a is e
p r ic e
in
th e
th a t
in c r e a s e ,
been
Th e
a
fro m
w o rld
p r ic e
has
w ag e s.
s t i l l
is
c i v i l i a n
view
c o n s c r ip
exam ple
in c re a s e
th e
fro m
i r r e l e v a n t
fu e l
c o n s id e re d
s o c i e t y .
in c re a s e d
o t h e r ,
p o ll
w ou ld
p r a c tic a l
f o r
b u t
be
in
I f
by
m a t t e r ,
q u a l i t y
th a t
p r o fe s s i o n a l ,
independence
o f
c i v i l i a n
t h a t
a
o f
s m a l l ,
w ar
view
i s
a
in c re a s e
e f fe c t
to
is
assess
to
tw o
i t
c e te r is
a b o ve .
tr u e
from
p r ic e
the
n e t
tr a n s l a t e
can
o n ly
p o in t
is
le a d
and
b e in g
p e r s o n n e l,
arm y
Pe r h a p s
b e n e f i c i a l ,
Th is
m i l i t a r y
p r ic e
fe e lin g s
th e
a c c e p te d .
p o l i t i c a l .
th e
th e se
e q u a l i za t i o n ,
i f
c a re e r
ad ju stm en ts
unknow n.
th e
o f
c o n s c r ip tio n
a c c e p te d ,
Th e
pay
i n d e x ,
p r o fe s s io n a l
th ro u g h
w ere
and
in s te a d
becom e
atte m p ts
change
p a y -p r ic e
to
th is
re q u ir e d
d r a f t
l i k e l y
tim es
n e t
th e
th e
o f
a d ju s tm e n t.
th e
from
h o w e ve r,
m ore
c o n c e p t
e xp a n s io n
each
m ent
be
lo w e r
com posed
th e
be
th e
c o n c e rn ,
b u t
lo w -s u lp h u r
s u b -s ta n d a r d
v ie w ,
change
to
o f
c i t i ze n
w ork
can
th is
p r i v a t e — w ou ld
arm ed
fr e e
to
s o c ia l
th e
a
th a t
s id e
re n d e r
r a p id
o f
a s p e c ts — fre e d o m
vo lu n te e r
a
p a r t
On e — fr e e d o m
v ie w p o in t.
Th e s e
la r g e
(se e
com parable
r a is e
by
b e n e fi t s .
i n d iv id u a l
t h a t
e lim in a tio n
caused
th e
p u rc h a s e r
to
o th e r
o f
th e
is
exc ess
concerns
b u y e r 's
th e
equal
Th e
in c re a s e
to
view
le v e l s
p a r ib u s .
I t
o f
som e
in
is
and
peac etim e
m aker
w ou ld
te n d
y e a r
to
a
b e n e fi t s .
s p e c u la tio n s
in d e x
th e
and
p r e fe r a b le
w ou ld
each
w ou ld
w ou ld
in
in d e x
in to
i n t o
th e
a
in
h ave
o f f s e t
c i t i ze n s '
As
an
a
a d j u s t
b r i a r
p a tc h .
A
betw een
m ore
p e r t i n e n t
c o n s c r ip ts
and
t h a t
th e re
v o lu n te e r s — m ore
is
a
q u a l i t a t i v e
w illin g n e s s
to
e n te r
d iffe r e n c e
c o m b at,
h ig h e r
196
m o rale ,
m ent
g r e a te r
c ost
argum ent
arm y
to
group
encouragem ent
to
op erate
conceptual
the
n ot
is
D OD
tr a in in g
ed u c ation al
and
s k i l l
e ffe c tive n e s s
(p ro vid e d
sim p ly
w ould
the
(s a vin g
be
low er
on
fo rc e s
r e l a t i v e l y
low .
d ir e c tio n s ,
fram ew o rk — a d j u s tm e n t
alw ays
h a p p in e s s ).
m i l i t a r y
o p p o site
o f
on
the
Th e
Th e s e
two
both
b asis
p o in t
is
o f
Th is
vo lu n te e r
average
w hich
r e c r u i t
l e v e l s .
"m orale"
the
b u t
the
and
is
d efin ed
is
also
because
exten d ed
th a t
those
the
e ffe c tive n e s s
as
m ade
w o u ld ,
w ith in
d r a ft
the
to
aspects
f a l l
vs .
o f
sam e
(p o s itive
n e g a tive ).
In
essen c e ,
s h p_u_¥ b e
tre a te d
t h e .o t h e r
a
on ly- th a t
th e
m_ent _ of
the
as
paym ent
b e n e fi t
st at i st i cal
anal ysi s.
i ncr eases,
f or
t i me,
t i al
dat e,
o f
No ve m b e r
c o n s is tin g
o f
tw o
an
(o r
e xtr a
lo s s )
b e n e fit
accrues
(q u a lity
to
the
Det er mi nat i on of
Unt i l
wi l l
and
a
tru e
p urc haser
i t mi ght
to
in
t he si z e of
the
the
Thus,
it
t o t r eat
t he magni t ude of
t he r ai ses as pr i ce
i s possi bl e t hat
i s t r ansmut ed i nt o per f or mance, t he i ndex
t o assess t he ef f ect i ve ne ss of
or under st at ement .
t he r ai ses ar e payment
t he r ai ses woul d c onst i t ut e a pr i ce i ncr ease.
when t he ef f ec t i veness i mpr oves
( but
accom plish-
t he adj ust ment ,
t her e may be some ov e r s t at ement
i mmedi at e per f or mance.
e xte n t
r equi r e st udy and consi der a bl e
be best
shoul d al so be r ecogni z e d t hat
raise s
i nc r eas p.
p ric e
change)
not
f or
Then,
f or pot ent i al
some per i od
as t he pot e n
woul d be l ower ed at a l at er
r et r oact i vel y) .
The f ol l owi ng sect i on deal s wi t h some anal ysi s,
done,
subsequent
some est i ma t e can be made of
however ,
r ecogni z i ng t hat
19 71
p a r t s — one
i s posi t i v e or negat i ve,
t he qua l i t y change,
not
ra is e
a mi ssi on or goa l .
it
It
pay
fo r
and whet her
of
h ig h e r
m ission
e n te r
in
r e e n lis t
w ith
vo lu n te e rs
q u a lific a tio n s
c o u rs e ,
o r
i t s
r a p p o r t,
o f
to
and
d i r e c t l y
accom plish
q u a li ty
whose
e f f o r t ) ,
deals
s p i r i t ,
the
and
readiness
whi ch has a l r eady been
t he move t owar d t he vol unt eer ar my.
197
b .
On e
re c e n t
A
i n t o
ac c o u n t
m ake
th e
D OD
to
m ay
d eterm in e
q u a l i t y
changes
th e
be
in
tim e
o f
Th e
s e le c te d
s e r vic e
w hic h
and
th e
th e
m ore
w hic h
is
in
pay
o f
"p u re "
th e
o f
pay
in d e x .
fo llo w in g
fin d in g s
and
com m ents
e m p h a s i ze
th o se
( p o s i t i v e l y
change
o r
o f
o r
i s
e ffe c t s
d e fin e d ,
D OD
h ap p in ess
w ith o u t
o f
th e
o f
o r
n e g a tiv e ly )
as
to
th e
s h o u ld
th e
to
th a t
to
sh o u ld
o f
p o te n tia l
are
o f
c h an ge.
As
(o r
th e
a t
i n t e r e s t
are
pay
i n d i v i d u a l --u n i e s s
s tu d y
e f f e c t
th e
g en eral
th e
s tu d ie s
th e
r e p o r t
to
b y
a llo c a te d
s t i l l
o f
c o n tr ib u tin g
re g a rd
be
o f
S i m i l a r
w ere
q u a l i t y
m ade
k in d
fin d in g s
fro m
ta k in g
changes
th e
p o te n tia ls
to
arm y,
d ete rm in e
w hich
m i l i t a r y
to
few
i s
r a is e
fu tu r e
som e
o th e r
in c r e a s e .
th e
w ith
p u rp o s e ly
r a is e
th a t
su g g ested
d e tr a c tin g
to
fro m )
w e lfa r e
o r
t h i s
c o r r e la te d
is
in
th e
to
e ffe c t i v e n e s s .
by
o f
vo lu n te e r s
2 1J
g ive n
2 1/
v o lu n te e r
Th is
p r ic e
n e a r
( 1)
the
a
Ar m y
and
a
c o n ten tm en t
average
r a is e
s o ,
e ffe c tiv e n e s s
m easured
th e
a t t r a c t i v e .
e n viro n m e n t,
s tu d y .
Vo lu n te e r
e va lu a te s
p r o p o r tio n
u n d e rtak e n
q u a l i t y
m i l i t a r y
o f
th e
Ev e n
c o n tr ib u te
th e
o f
s tu d y
e ffe c t s
m i l i t a r y
c o n n e c tio n
a b o ve ,
th e
change
p o s s ib ly
Ev a l u a t i o n
--- -------
average
" Th e
average
a l l
m ental
Ar m y
ac c e ssio n s
ac c ep ted
m ental
as
o f
I I
Vo lu m e
th e
Ï Ï ,
An a ly s is
o f
RAC-NVA
Re la tin g
to
th e
vo lu n te e r "
a n a lys is
to
was
be
19 6 4 -19 71.
are
RAC
A l l
in te g r a l
u n d e rta k e n .
p a r t
Am y
Th u s ,
ac c e ssio n s
Ar m y
(VA)
Vo lu n te e r
Re s p o n s e s ;
Vo lu n te e r
th e
r e p r e s e n ta tive
Vo lu n te e r
th e
o f
s u b s t a n t i a l l y
v o lu n ta r y
Su rve y
M odem
an
o f
Modern
was
fro m
ac c ession s
c a te g o ry
Ev a l u a t i o n
Re p o r t;
c a te g o ry
q u a l i t y
A m y .
o f
th e
vo lu n te e r
th e
i f
o f
sam e
th e
Pro g ra m ,
Data
Vo lu m e
I V ,
Ba s e ;
be
e n a b lin g
th e
v o lu n te e r s ,
th e
Vo lu m e
o f
FY
72
Vo lu m e
Stu d ie s
Id e n t i f i c a t i o n
s t u d y ,
FY
fu tu r e
sh o u ld
as
in
and
sam e
I ,
as
Ph a s e
I I I ,
Su rve ys
" tr u e
m e an in g fu l
72
as
198
th e
a c c e ss io n
m o tiva te d
was
due
fo r c e
o f
19 6 4 - 19 71
p e r s o n n e l.
in
p a r t
to
Th e
w hich
average
sc reen s
on
in c lu d e d
q u a l i t y
Ca te g o ry
o f
d r a fte e s
FY
72
III-N H S
and
and
d r a f t -
v o lu n te e r s ,
h o w e ve r,
Ca te g o ry
e n lis te e s
IV
22/
d u rin g
p a r t
a b i l i t y
h ig h e r
o f
th e
th e
i t
c a te g o ry
is
as
q u a l i t y
y e a r ."
em ployee
q u a l i t y
m easure
o f
o f
is
o f
th e
th e
th e
in
a
bonus
are
th e
i f
q u a l i t y
p r e d i c tio n
m u ltip le
be
I I I :
Pr i c i n g
is
in
t h a t
th e
fu tu r e
i m p l i c i t .
(s e e
Ho w
w ith
to
"m e n ta l"
He d o n ic
m ethod
Ge n e r a l).
o n ly
e ffe c t s
to
o f
r e g re s s io n
fe a s i b l e
in d ic a te s
s i g n i f i c a n t
c o r r e la te d
in c re a s e
w ou ld
a n a ly s is
h ave
and
Pe rh a p s ,
Ch ap te r
" Th e
c a te g o rie s
jo b
th en
va r ia b le s
a d ju stm e n t
and
do
m a tte r .
th e
(2 )
in c re a s e
to
r e a l i ze d ,
a n o th e r
one
I f
in
th e
m i l i t a r y
in c r e a s in g
m ay
th e
h ig h e r
th e
m i l i t a r y
23/
q u a l i t y
Ca te g o ry
I ,
I I
(3 )
pay
in c re a s e
pay
r a is e
to
and
a
be
v o l u n t e e r s ."
" Th e
c o s t
lo w e s t
in
l a r g e r
in c re a s e d
v o lu n te e r s .
a v a ila b le
f o r
e ffe c tiv e n e s s
c o s t
b u d g e t
Th is
in c e n tiv e
in
e ffe c t i v e n e s s ,
o th e r
a n a ly s is
program s
m easurem ents
program s
w ou ld
sh o u ld
in d i c a ti n g
w ou ld
in d ic a te
go
i n t o
show
h ave
t h a t
program s
t h a t
a
s m a lle r
r e s u lte d
in
a d d itio n a l
m oney
o th e r
g en eral
than
24/
m i l i t a r y
pay
r a is e
a
as
n a tive s
can
u te d
be
to
in c re a s e s
q u a l i t y
sh o u ld
used
th e
to
n o t
t o o ,
be
22/
I b i d . ,
2 3 /
I b i d .
24/
I b i d . ,
th e
in
in
Th e
th e
Th is
p a r t ,
c o n s id e re d .
e s tim a te
in c re a s e
" Fo r
E 1 - E 3 ."
in c r e a s e ,
(4 )
He re
f o r
b u t
o f
e ffe c tiv e n e s s
s tu d y
fu n d e d
th e
Vo lu m e
I ,
Ph a s e
I I ,
pages
Vo lu m e
I ,
Ph a s e
I I ,
page
and
assesses
a
one
the
th a t
c o s t-e ffe c tiv e n e s s
o b ta in in g
c o s t
S -10 .
g r e a t
in c re a s e
com bat
S-2
so
th e
p r ic e
in
a n a l y ze s
program s
n o t
Pe r h a p s
p o r tio n
c o n c lu s io n
arm s
t h a t
be
a l t e r
fig u r e s
a t t r i b
v o lu n te e r s .
vo lu n te e r s
e ffe c tiv e n e s s
S -3 .
can
pay
o f
s e p a r a te ly .
th e
bonus
199
and
a d v e r tis in g
are
th e
h i g h e s t,
fo llo w e d
by
in c re a s e d
r e c r u i te r s
and
th e
25 /
m i l i t a r y
pay
responded
No ve m b e r
t h a t
19 71
in d ic a te d
w e re :
70
Hig h
the
(5 )
Re -e n lis tm e n t
th e y
w ou ld
pay
th a t
th e y
Fo r
w ou ld
o r
and
n o t
was
who
betw een
th e
r e -e n l i s t
50
in d ic a te d
was
s tu d ie d :
w ou ld
V OLA R
even
w ith
p e r c e n t;
pay
th e
a d d itio n a l
in c re a s e
and
f o r
who
d e s p ite
p e rc e n tag e s
pay
th e
who
in c re a s e s
g r a d u a te s --a b o u t
r e -e n l i s t
l i n e a r
th o se
r e -e n l i s t ,
Co lle g e
w ou ld
p r a c t i c a l l y
" Fo r
n o t
p rog ram ,
th e y
p e rc e n tag e
p o te n tia l
a ls o
p ro b a b ly
g ra d u a te s — ab o u t
th ose
r e l a t i o n
r e e n lis tm e n t
n o t
in c r e a s e ,
sc h ool
p e r c e n t.
p a y ,
in
r a i s e ."
f o r
a d d itio n a l
in d ic a te d
pay
in c re a s e
in c re a s e s
in
th e
m easurem ent
o f
th e
Oth e r
need
26/
range
5
to
Th e
e f f e c t
in g
o f
15
p e r c e n t ."
s tu d y
p o in te d
changes
im provem ent
c o n d i ti o n s ,
th e
s u rve y
A
d i f f i c u l t y
th e se
o c c u rre d
th e
view s
o f
in
p ic tu r e "
th a t
Ar m y
o f
l i f e
th e
th e re
o f
and
w ere
t r a i n i n g
p a in te d
Modern
s e p a ra te
s im u lta n e o u s ly .
respon den ts
a s s is ta n c e
o f
com parison
in d ic a te
th e
when
e d u c a tio n a l
"g lo w in g
d i t i o n s .
o u t
by
Vo lu n te e r
has
been
an
is
m ade
t h a t
p erson al
and
th e
im provem ent
and
(M VA)
in
l i b e r t i e s ,
d ive rg e n c e
r e c r u ite r s
Ar m y
areas
betw een
a c tu a l
and
w ork
c on
V OLA R - 71
re d u c in g
i r r i t a n t s
2 7/
o f
Ar m y
l i f e .
(6 )
m ore
l i k e l y
to
A
r e -e n l i s t
(7)
to
p erson al
p o in t
freed om
than
d r a ft e e s .
Th e
s u rve y
p o in te d
m ay
be
c au sin g
an
vo lu n te e r s
o u t
t h a t ,
e r o s io n
o f
are
"som e
s i g n i f i c a n t l y
o f
th e
d i s c i p l i n e ,
c on c ession s
and
d i s c i p l i n e
28/
is
g e n e r a lly
agreed
to
be
th e
25 /
I b i d . ,
Vo lu m e
I ,
26 /
I b i d . ,
Vo lu m e
I I I ,
Ph a s e
page
ZJ
I b i d .,
Vo lu m e
I I I ,
pages
28 /
I b i d .,
Vo lu m e
I I I ,
page
backbone
I I ,
page
2 -4 1.
4 .
6
5 5 .
and
o f
4 6 .
any
arm ed
f o r c e ."
Th is
200
com m ent
r e in fo r c e s
th e
e a r l i e r
on
th e
b a s is
o f
c o n tr ib u tio n s
on
th e
b a s is
o f
c o n tr ib u tio n
o th e r
c a u tio n — t h a t
to
th e
to
change
o f
th e
d e s ir a b le
as
sh ou ld
be
m i l i t a r y ,
t h i s
m ay
be
judged
n o t
f o r
re a so n s.
r e l a t i n g
to
the
s id e re d
such
p a p e rs ,
and
s e rio u s
W ar.
o f
e ffe c tiv e n e s s
h a p p in e s s ,
(8 )
a
q u a l i t y
vo lu n te e r
and
as
s e l f
m o tiva te d
h ig h
sc h ool
fa m ily
to
f r i c t i o n ,
becom ing
e n lis te e s
f o r
d ec rease
dropped
to
o u t
b ac k g ro u n d ,
o f
b u t
w e ll
c o lle g e
had
m ore
end
o f
An o th e r
e n lis te e s
le s s
n o t
s u p e r io r s
im p o r ta n t.
be
19 72 )
in
o th e r
new s
re p re s e n tin g
the
Vie tn am
and
r e fu s a l
( Ju l y
19 70 )
A i r
Fo r c e -
th e
e d u c a te d ,
o f
con
un dergroun d
as
th e
f o r
c o m p ila tio n
( Ja n u a r y
houses
w ith
d is r e s p e c t
m ore
a
p u b lis h in g
c o ffe e
d r a ft-m o tiv a te d
ten d ed
c o n ta in s
e xam p le ,
d e m o n s tr a tio n s ,
l i k e l y
w ith
c o u rs e s ,
On e ,
s tu d y
a n t i -m i l i t a r y
one
view ed
t h a t — com pared
:
a t
i n t e r r a c i a l
was
p r i v i l e g e d
as
atte n d an c e
problem
o rd e rs
arm y.
a c t i v i t i e s
Dr u g s ,
fo u n d
Th e
a vo id e d
from
advanc ed
e a r l i e r ,
cam e
le s s e r
p o s i t i v e
a t t i t u d e s ,
in c lu d in g
e c o n o m e tric
c o n s id e r
29 /
a
d e s ir e
to
Th e
a tio n s
le a r n
s tu d y
in
a
m a rk e ta b le
p o in ts
e s tim a tin g
to
th e
wage
s k i l l .
v a l u e ,
e l a s t i c i t y
a l s o ,
and
o f
b road
m oney
c o s ts
o f
th e
a l l
vo lu n te e r
30/
arm y.
I t
is
p ro c e e d in g
e v id e n t
t h a t ,
w ith
a
s im u lta n e o u s ly
w ith
th e
in g
s e p a ra te
29 /
I b i d .,
30/
Se e :
th e
P.
va lu e s
Vo lu m e
Fi s h e r ,
D r a f t ,"
K l o t z
and
to
I V ,
each
page
An th o n y
Am e r ic a n
r e p ly
by
i s
num ber
pay
o f
in n o va tio n s
in c r e a s e ,
d i f f i c u l t
and
m ay
th e
o r
im provem ents
problem
som etim es
o f
n o t
a s s ig n
be
p o s s ib le
3 -10 .
C .,
" Th e
Ec o n o m i c
Fi s h e r
Co st
o f
Re vie w ,
in
th e
D r a ft
and
Th e
Ju n e
19 6 9 ,
and
com ment
De c e m b e r
19 70 .
Co s t
o f
by
En d i n g
Benjam in
s tu d i
201
because
an
o f
s t a t i s t i c a l
e f f e c t
w hich
m ay
h ave
aw kw ard
in g
o r
le ad s
w ou ld
m ore
g r e a te r
c .
n o rm a lly
h ig h ly
d is s e n t
Oth e r
s u c h ).
tim e
f o r
o f
an
Fo r
h ave
n o t
wages
o r
to
cause
o f
o v e r tim e ,
a
e x tr a
th is
to
th e
o u t
r e c e ip t
h o u r .
e x te n t
o f
W ages
ten d s
o f
to
t h e i r
(GS)
jo b s
to
c a l l y .
Th u s ,
re g io n s
so
be
th e
lon g
e s ta b lis h in g
Sys te m ,
and
as
by
w hich
th e
s e ts
som e
e xa m p le ,
p o t e n t i a l l y
o r
as
a
c irc u m s ta n c e s ,
p o in t
o f
view )
success
in
r e c r u i t
c ap ab le
p erson n el
p e rfo rm an c e ?
e xp e d itin g
q u a l i t y
and
o f
s e r ie s
seem s
used
is
th e
in
o ve rtim e
and
used
as
q u e s tio n
c o n s id e re d
i f
view ed
from
c o n s tr u c tin g
to
w ith
h o u r
as
o f
be
as
s t r a i g h t
p r ic e
in d e x
b a s ic
ra te s
is
o r
som eth in g
the
m eans
s h o u ld
use
a
a
in c re a s e s
w ith in
a
be
d e p a rtu re
d e c is io n
change
sound
m ay
in c re a s e
s i m i l a r
th e
to
an
o ve rtim e
dec reases
m ore
c on c ept
than
r e s t r a i n t s ,
in c r e a s in g
pay
w i t h
re vie w e d .
Em p l o y e e s
to
h o u r ly
r a te
em ployees
Fu r t h e r m o r e ,
Re s p o n s i b i l i t y
th is
re a s o n ,
d eterm in e
o v e r l y
i t
is
tem poral
u n ifo rm
and
w i l l
fr e e
w ith
to
e s ta b lis h m e n t
jo b
sta n d a rd s
are
n o t
p a id
o f
u n d er
to
s e l e c t
I t
jo b
r e p r e s e n ta tive
is
a s s u re d .
wage
o f
o f
b oard
th e
f o r
Th e
is
jo b
w ages
re c e ive d
a
sam ple
fo r t u n a t e l y
d u tie s
g e o g ra p h i
jo b s
w ith in
w ork
o f
em ployees
Co o rd in a te d
m ost
g en eral
p r e v a i l i n g
c o m p a r a b ility .
u n ifo r m ity
th e
s u p e r vis io n
n e c e ssary
choose
f o r
a re
degree
be
c o m p a r a b ility
s p e c i fi c a ti o n s
re c e n t
th e y
t im e -to -tim e
c oncerned
sam p ler
s u i t a b l e
D OD 's
o v e r -a l l
r e s u l t
s yste m .
Fo r
(fro m
f o r
e x p l i c i t l y
c o u n tin g
l o c a l i t y .
v a r y .
u n n ec essary
p a id
grade
to
f a c i l i t a t e d
been
b e n e f i t ,
Board
i f ,
o ve rtim e
Th is
th a t
e x tr a
W age
a c c o rd in g
(o r
th e
Th e
essence
in
Ch an g e s .
c o n s t a n t -d o l l a r
8 .
s e r vic e
lo w e r
q u a n t i t y
o r d i n a r i l y
in
W hat
prom ptness
re a s o n ,
s t r a i g h t -t i m e
b u t
f o r
s a l a r i e s .
th e
and
A l s o ,
d e s ir a b le
e d u c a te d ,
Qu a l i t y
Pa y m e n t
purc hase
be
s i d e -e f f e c t s .
r e ta in in g
to
m u l t i -c o l l i n e a r i t y .
sh o u ld
Fe d e r a l
c a te g o r ie s .
be
Wage
202
9 .
Re tire m e n t
Th e
th e
D OD
th e
c i v i l i a n
a sp e c t
r e tir e m e n t
b u d g e t
o f
and
w i l l
c i v i l i a n
Re tir e d
o f
t h i s
tre a tm e n t
is
w hich
are
is
a w k w a rd );
q u a n t i t y
s o lu tio n
th e
D OD
e m p loyer
b u d g e t,
is
p a r t
o f
c o n tr ib u tio n s
h o w e ve r,
and
to
o n ly
t h i s
d is c u s s e d ,
w ays
t h i s
va lu e
is
m ost
va lu e
o f
be
added
c u r r e n t
d o l l a r
b i l l
w e ll
as
be
ac c e p t
c o n tin g e n c y
as
to
m ig h t
sam e
m ore
as
a
to
som e
b a s ic
fi g u r e
th e
to
incom e
j o b ,
c a lc u la tio n
t h a t
to
p a r t
o f
as
be
tr e a te d
be
p a y r o ll
as
(e ve n
th e
f o r
in
the
th e
p re s e n t
Th e
th e o ry
a
p re s e n t
h ave
a
do
fr i n g e
p re s e n t
n o t
va lu e
in d e x
d e fla te d
w ou ld
in c lu d e
o th e r
person n el
q u a n tity
is
o f
o f
r e t i r e
in
q u a l i t y
i t s e l f .
and
d e f l a t e .
Th is
m e c h an ic s.
v a lu e .
b e h in d
Th is
i t
to
s a la r y
b e a rin g
is
s o lu tio n
th a t
the
em p lo ye e s,
paym en t.
on
an
In
a p p l i c a n t 's
b e n e fi t s .
Fr o m
(in c lu d in g
a llo w an c e
c o l l e c t
p r ic e
by
problem s
a
law
va lu e
b e n e fits
o th e r
d e fla te d
changes
the
th e
and
o f
t o t a l
and
w i l l
Th e
r e tir e m e n t
wage
th e
p a y.
se p a ra te
e xc e p t
o f
be
m a n -h o u r s
p a y r o ll
has
c o u ld
c on c ept
th e
em ployees
p a y ,
th e
th e
( 1 ) ,
r e tir e m e n t
g ive n
in
a c t u a r i l y ,
as
m i l i t a r y
ig n o re s
c o m p lic a te d .
view ed
o f
f o r
va lu e
v i s u a l i ze
changes
r e tir e m e n t
c o n s id e r a tio n s
sh o u ld
can
a
to
Th e
in vo lve s
tre a tm e n t
th e
b u t
f a c t ,
t h a t
t h i s
C a l c u l a t e ,
a c t u a l l y
fo llo w s
d e vis e d
r e tir e m e n t
Ad d
w hich
to
th e
a t t r i b u t a b l e
a p p e a lin g ,
d e c is io n
is
th a t
and
v i r t u a l l y
d isc o u n te d
s e p a r a te ly .
d i f f i c u l t
(3 )
th e
On ly
p erson n el
Pe r s o n n e l.
s e ve ra l
d e fl a t o r
(2 )
i t
h e r e .
in
is
M i l i t a r y
D e fla te
w h a te ve r
r e tir e m e n t,
is
are
m i l i t a r y
in d e x:
m eans
and
fo rm e r
tr e a te d
fu n d
are
0 )
m ent
f o r
r e tir e m e n t
Th e r e
w ith
be
r e tir e m e n t
a .
p r ic e
pay
t h i s ,
r e tir e m e n t
incom e)
c o n s tr u c te d .
Th e
th e
t o t a l
b e n e fi t s .
f o r
t o ta l
r e tir e m e n t
203
A
fu r th e r
the
c u rre n t
and
the
d o lla r s
p resen t
Als o ,
i t
r e tir e e s
inc reases
in
be
re s u lte d
in
b .
to
grade
the
re tire m e n t
ing
in
upon
the
the
c i v i l i a n
s u b je c t
to
p erc en t
value
o f
on
In
th e
b asis
sim ply
to
to
to
the
p resen t
rem ain
as
to
p ric e
from
pay
c o s t,
r e tir e e s )
b e n e fits
change
o f
betw een
h ig h -fiv e
c a lc u la tio n )
unless
they
r e c ip ie n t,
Re tir e e s .
be
s e c to r .
to
re tire m e n t
the
p aid
in c reased
in c re ase s)
(l i k e
lag
re tire m e n t
a llo w
c i v i l i a n
D OD — n o t
govern m en t
to
the
fu n d .
c o n s tru c t
tre a te d
task
any
w ould
o f
Th is
the
as
pays
ris e s
agency
the
and
o r
the
c o n tr ib u tio n
in c lu d e d
in
the
an
am ount
d e fl a t o r .
p ric e
the
e ve n t,
be
a g e n c ie s,
e s ta b lis h e d
m ight
be
added
Ch a n g e s
in
the
d e c lin e s ,
costs
o f
depend
in c u r r e d ,
D OD
to
c u r r e n t-d o lla r
as
the
valu e
Pu r c h a s e s
a p p ro p ria tio n
c o s ts— to ta lin g
m ost
d ir e c t
" M i l i ta r y
less
o b lig a tio n s .
Th e
Pe r s o n n e l"
than
im p o r ta n t-s u p p lie s
t he det ai l ed nat ur e of
10
and
budget
t hese expendi t ur es.
and ma gni t ude i s shown i n an Oct obe r
of
to
b e n e fits
re tire m e n t
on
Ot h e r
Th e
o f
p resen t
being
the
d e fl a ti o n .
personnel
19 72 .
to
used
fu n d
are
fo r
o th e r
m igh t
e ffe c ts
Th e
FY
and
re tire m e n t
10 .
than
l i k e
w hich
in c reases
Se rvic e
b e n e fits
m i l i t a r y
b asis
em ployees'
ra te
the
a
c o n s id e ra tio n
(an d
a d visa b le
Ch a n g e d
b e n e fit
C i v i l
in to
c o s t -o f-l i v i n g
p ric e
D OD ,
in to
be
as
as
as
e xtr a
am ount
w ould
ye ars
take
d e fla te d
in d e x.
tre a te d
w ould
in c lu d e s
(su c h
the
h ig h -th r e e
w ould
being
d e f l a t o r ,w h i c h
em ployees.
to
re fin e m e n t
19 71
p erc en t
in c lu d e s
fo r
the
expen ses
o th e r
c ateg ory
in
m a t e r i a l s — am ounted
to
about
3
back- up sheet s shoul d r eveal
An i ndi cat i on of
t hei r
nat ur e
pr i ce st udy by t he De par t ment
31/
t he Ar my . — ■
31 / Lynch, John E. and J. St ephen Tur et t , o £ ^ c v t . Thi s i ndex uses BLS whol e
sal e pr i ce dat a f or pr i ci ng; hence, t he di f f er ence bet ween t he WPI and
t he nonper sonnel mi l i t ar y pr i ce i ndex i s due t o di f f e r ence i n wei ght s.
204
Dis c u s s io n
a tio n
m ent
is
o f
d e fe r r e d
Se c tio n s .
to
o th e r
e i t h e r
W hether
h en sion
o f
d e s e r te r s
because
o f
t h e i r
11•
th e
o f
to
b a s ic
pay
num bers
been
be
a t
and
each
(C o m p t r o l l e r ),
o f
r e tir e m e n t
to
be
th e
o f
t h i s
A
was
to
jo b
a b le
has
to
sam ple
sam plin g
is
a v a i l a b l e .
p erson n el
c o s t
a s p e c t
o f
s te p .
NSF
o f
w ay,
th e
vo lu n te e r
d ata
ac c om p lish
t h i s
fo r
e n c o u n te re d .
I t
fo r
wage
p ro b a b ly
wage
board
board
m i l i t a r y
th e
re a d y
o f
D OD,
to
w hich
and
each
f a c t ,
o r
c o s t
n o t
a p p r o p r i
th e
Pr o c u r e
f o r
been
a p p re
a s c e rta in e d
p erson n el
c a te g o r y ,
re fe re n c e
and
by
has
been
th e
th o u g h t-p r o v o k in g .
case
o f
th e
th e
form
h ave
th o se
o f
a n a lys e s
th e
a lr e a d y
OAS D
m ade.
p re s e n t
Da ta
o f
o f
in c lu d in g
in d exes
in c lu d in g
in
sh ou ld
a v a i l a b i l i t y
s e ve ra l
change
som etim es
to
f o r
has
f o r
in
q u a l i t y
c o s tl y
p erson n el
In
p a rts
in
o f
p erson n el
e ffe c t
m ore
in d e x
because
h ave
be
Ar m y
t h i s
m ag n itu d e .
p r ic e
and
done
th e
m i l l i o n
w i l l
d e s c r ip tio n s
Ex c e p t
a
o r
th e
been
board
sh o u ld
be
a lo n g
c h a n g e -o ve r
needed.
a l l
th e
w i l l
d evelop ed
• Wage
lem s
o f
in
M ain ten an c e
$ 3 .2
sim p le
W in e s to n e ,
Es t i m a t e s
So m e
o f
num bers
fo r
and
th e
sm all
w ith in -g r a d e
c o n s tru c te d
e xp e n d itu re s
Da ta
r e l a t i v e l y
r a te s
Op e r a tio n
l i k e
any
r e l a t i v e l y
Co n s tr u c tio n
p ro ve
th e
item s
has
So u r c e s
n o n -p e r s o n n e l
va lu e
w i l l
s p e c ia l
h ave
s tu d ie s .
c o in c id e n t
w ith
arm y.
a re
be
g e n e r a lly
draw n
fo r
R D T & E.
w ould
u n n e c e s sa ry.
Th e
a v a i l a b l e
th e s e ,
Th e r e fo r e ,
be
em ployees
em ployees
n o t
and
w ise
to
th an
f o r
no
th e
d a ta
o f
th e
B LS - N S F
form
s tu d y
in s u rm o u n ta b le
d e vo te
was
u n ive rs e
b u t
in
done
m ore
in
needed
b as ic
p ro b
a t t e n t i o n
th a t
to
s tu d y .
in
s p e c ia l
d ata
seem s
s tu d ie s ,
r e a d i l y
205
F.
Op e r a tio n
Th e
D OD
d a y -to -d a y
anfl
M ainten an c e
a p p r o p r ia tio n
c o s ts ,
e xc e p t
th e
s u p p o rt
a c t i v i t i e s
o f
am ounts
fo r
c i v i l i a n ,
pay
Fo r c e s ,
o f
and
f a c i l i t i e s ,
e q u i p m
e n t .D i r e c t
th e
D OD
t o t a l .
Of
ac c ounted
fo r
8 2 .2
s e r v ic e s ,
3 4 .2
p o r ta tio n
o f
s e r v i c e ,
o lo g y
been
th in g s
and
problem s
d isc u sse d
fo r
cedures
o f
re a s o n ,
d is c u s s io n
o f
s a la r ie s
even
a re
purchases
p a r ts
32/
in
0 &M
an
u t i l i t i e s
f o r
4 .9
th e
w ith
c on ven ien c e
o f
a
p r ic e
0 &M
w i l l
th e
m ain tenanc e
and
th e
c i v i l i a n
econom y.
19 74
0 &M
am ount
to
o f
m a t e r i a l s ,
run
th e
be
m i l i t a r y
c o n fin e d
p e rc e n t
to
o f
and
th e
l i k e l y
to
s o -c a lle d
U .S .
th e
and
branches
Th e
h ave
and
p ro
Fo r
t h i s
w ages
a sp e c ts
and
a p p r o p r ia tio n .
c l a s s ,
c o n s is t
h ave
f a i r l y
c lo s e
Go v e r n m e n t .
o f
m ethod
a
" s h e l f
Tr a n s
r e n t
n o n -p e r s o n n e l
D OD
o f
o th e r
c om pensation
m ain tenanc e
as
p e rc e n t
p e r c e n t;
p e rs o n n e l.
th e
and
c la s s e s
c on c epts
c i v i l i a n
e x p e n d itu r e s ,
Th e
w ith
e q u ip
p e r c e n t.
sam e.
p erson n el
o f
o b je c t
p e r c e n t,
Am o n g
f o r
in c lu d e
30
3 1 .4
m ain
r e la te d
w eapons
th r e e
1 6 .6
p e r c e n t.
c o n ju n c tio n
s e r vic e s
Budget
c o m p e n sa tio n ,
ab o u t
f o r
n e a r ly
o b l i g a t i o n s ,
o p e r a tio n
p ro d u c ts
Ye a r
in
90
o f
Fi s c a l
p a r ts
c i v i l i a n
in d e x
ab o u t
in
r e p a i r
6 .1
and
fu n d s
"th e
and
m ain tenanc e
and
and
o p e r a tin g
Th e s e
fo r
a d d itio n a l
p r o p o r tio n s
conn ec ted
though
and
s u p p lie s
o f
fin a n c e s
c om pon ents,
s e r vic e s
p erson n el
and
c o s ts ,
De fe n s e .
d i r e c t
fo r
expen ded
Op e r a tio n
f o r
ac c ou n ts
p re p a rin g
p r i c i n g ,
t o t a l
p e r c e n t:
s e p a r a te l y ,
and
s u p p lie s ,
m ain tenanc e
re s e rve
o f
c o n tr a c t
o b lig a tio n s
th e
th e
De p artm e n t
f u e l ,
and
p erson n el
in c lu d in g
th e
p e r c e n t;
com m unications
o p e r a tio n
m i l i t a r y
ta in in g
m ent
Ar m e d
f o r
ite m s"
a re
o f
c o u n te r
l a r g e l y
206
in
a
t h i s
c a te g o r y ,
r e l a t i v e l y
Stan d ard
a
h ig h
In d u s tr i a l
li k e l i h o o d
o f
g o o d s,
tio n s
o f
th e
In
a
le ve l
sam e
volum e
o f
m any
1.
" Oth e r
as
r a t e l y .
A
as
o r
th o se
a tte n ti o n
c la s s e s
e a r l y
by
has
betw een
I t
is
D OD ,
Pr ic e
can
In d e x,
under
th e
sam e
term s
p ric e d
f o r
th e
be
a ls o
o f
to
p ro vid e
Su p p ly
th e
area
fo r
and
th e
Co d e s
w here
th e re
c i v i l i a n -m a r k e t
fo u n d --a m o n g
d ata
th e
is
c o u n te r
s p e c i fi c a
f o r - exam p le .
th e
to
l i k e l y
Fe d e r a l
be
h o w e ve r,
goods
(as
a re
to
n o t
purchased
d is c o u n ts )
c i v i l i a n
goods
in d e xe s .
th e se
ite m s .
g ive n
to
p r ic in g
c o n s is ts
o f
0 &M
s e r vic e s
and
r e n ts .
a t
o r
in
Fo r
th e
th e
t h i s
S e r v i c e s 11
c a te g o ry
o f
m ost
d e s c r ip tio n s
th e
c a s e s ,
t r a n s p o r t a t i o n ,
l i s t
c a te g o ry
m atch
p ro d u c t
W holesale
re a s o n ,
Th is
th e
C l a s s i f i c a t i o n .
th a t
s a le
as
is
purchased
B LS
g r e a t
sam e
i t
s u c c e ss fu l
p a r ts
Ar m y
and
u t i l i t i e s
" o th e r "
Th e s e
c a te g o r ie s
in c lu d e d ,
by
a c t i v i t y
Co n tra c tu a l
Eq u i p m e n t
M ainten an c e
is
fo llo w s :
C ON U S
EU R O P E
TAI W AN
Pu r c h a s e d
Eq u i p m e n t
Eq u i p m e n t
M ain ten an c e
Managem ent
Op e r a tio n
A i r c r a f t
M ainten an c e
-
A IF
Stu d ie s
Re s e a r c h
Stu d ie s
Se rvic e s
A i r c r a f t
Re p a irs
A i r c r a f t
Fu e l i n g
A i r c r a f t
Co n tr a c to r
Se rvic e s
P i l o t
Tr a in in g
are
th an
such
l i s t e d
p ro vid e d
sepa
fo r
th e
207
Oth e r
Pu r c h a s e d
Se rvic e s
Se rvic e s
Oth e r
Co n tr a c to r
M ainten an c e
M ain ten an c e
o f
Fa c i l i t i e s
and
M ain ten an c e
o f
Fa c i l i t i e s
M in o r
Co n s tr u c tio n
(Co n tr a c tu a l)
M in or
Co n s tr u c tio n
(C o n tr a c tu a l)
M edic al
Em p l o y e e
Jr .
VA
p rove
th e
d i f f i c u l t
in
Se r vic e
s ta n d a rd s .
e xam p le ,
num ber
Th e
num ber
o f
m e t h o d ,w h i c h
a c tu a l
c o s t
r e p a i r
w i l l
to
ite m s .
s p e c ifie d
l ^ r h e
th e se
r e c o r d s ,
c harged
in d e x
w i l l
h ave
s a id
o f
be
been
t h i s
e s ta b lis h
w i l l
In d e x
in
o f
m ethod.
fo r
e t c .,
be
th e
th e
th e
be
p ric e d
B LS
can
fro m
a t
each
produces
be
p a r ts
f o r
p r ic e
p r ic in g
an
a p t
o f
to
e s
fo r
i d e n t i f i e d .
th e
in vo ic e s
d eterm in ed
o f
c o n t r a c t o r s ,
w ith
n e c e ssary
t i m e -t o -t i m e ,
is
d i f f i c u l t y
by
Allo tm e n t)
ease
u t i l i t i e s
fu r n is h e d
Th e n ,
( Op e n
r e l a t i v e
than
o f
Co s ts
ac c ordan c e
th e
w i l l
a
Pe r s o n n e l
s p e c ific a tio n s
d e te rm in e d .
o ve rh e a d ,
s e r vic e
because
s e r vic e s
D OD
to
o th e r
d e te rm in e d
D OD
to
m a in ly
to
Gu i d a n c e
re s p e c t
s e r vic e s
r e p a i r
c h arges
Se r vic e
H o s p i t a l i za t i o n
w ith
r e p a i r
th e
Pr ic e
by
C i v i l i a n
ty p ic a l
Th e n ,
r e p a i r
Co n s u m e r
p r ic e
o f
Se r vic e
Tr a n s i t i o n
f i e l d ,
Fo r
Co s ts
M edic al
Zo n e
p r ic in g
ta b l i s h i n g
a
been
any
In s tr u c t o r
M edic al
Oth e r
0&M,
Co m p e n satio n
M edic al
Pr o j e c t
in
Co s ts
Lo a d i n g
Ca n a l
Ge r m a n y
Fe e s
Po r t
HEW
Ge r m a n y
Co sts
R OT C
C ON U S
-
-
Se rvic e s
Ph ys ic a l
Tu i t i o n
p r ic in g
Pla n ts
and
A FEES
has
Se rvic e s
G OC O
Re p a ir
CHAM PUS
w hat
o f
Re p a ir
Cu s to d ia l
De s p ite
Ag e n c ie s
Te c h n ic a l
sam plin g
o r
and
th e
o th e r
th e
"s ta n d a rd "
s e r i e s ,
th e
33/
d a t e .—
a u to m o b ile
la b o r
r e p a i r
sam e
208
Th e r e
is
one
r e p a i r
s e r vic e
r a t e .
He n c e ,
th e
m a te ria l
so
lo n g
as
key
is
th e
fo r
th e
p erfo rm s
th e
sam e
i t
i m p l i c i t l y
th e
change
th e
e a s ie r
r e p a i r
Fo r
a ls
I t
is
fo r
done
w ould
v s .
I f
and
i t
is
w ork
r e p a i r
wage
w ould
in d e x
o f
d u c t i v i t y
in d e x
fo r
p r o v e d ) .- ^ T h i s
la b o r
n e a r ly
^
e
e
D OD
c o s t
f o r
(2 )
com parable
IV :
to
is
go
o f
la b o r
p r ic e
o r
fou n d
r e p a ir s
,a s
p r ic e
ve r y
w e ll
and
c o n s ta n t,
r e f l e c t
case
th e
new
h ow ever,
q u a l i t y .
fo r c e
o n ly
w ould
c i v i l i a n
in d exes
d e s ir a b le
purc hase
now
fo r
th e
m a te r i
h ave
pay
hp
to
been
in d e xe s .
e s ta b lis h p H
com pare
con
sam e
th e
be
j o b ,
r e p a i r
c om parison
and
w ould
Pr ic e
i t
m ig h t
(a n d
is
Th e
by
th e
based
In d e xe s .
tre n d
w ith
D OD
on
im
m a te ria l
fo r
l i g h t
th e
on
th e
p ro
a g a i n s t :( l )
s e r vic e s
th ro w
th a t
p r ic e
h o p e fu lly
te s te d
(in p u ts )
l i k e l y
com bined
be
a d ju s te d
th en
in d exes
e f f o r t .
p rep ared
c o u ld
th e
jo b
p r ic e
s e r i e s ,
t h i s
and
c o n tr a c to r
f i r s t
P r o d u c t i v i t y
used
b ein g
in d e x
p r iv a te
to
r e p a i r
la b o r
s e r ie s
Th e
to
(in
o f
re p la c e d
c o n s ta n t,
in d e x
s p e c ia l
beyond
s p e c ifie d
o f
j o b .
own
h eld
th e
o rd e r
h e ld
typ e
wage
in d e xe s .
typ e
th e
i t
is
m i l i t a r y
se t
as
p r o d u c t i v i t y
to
and
s p e c i fi c a t i o n
w e l l )
in
e n ti r e
p r ic e
th e
used
W hat
la b o r
Th e
n e c e s s a r ily
as
p r o d u c t i v i t y -a d j u s t e d
a
p r ic e
n o t
(an d
and
i t s
th e
a
i f
i t s e l f
a d ju s te d
and
Ch a p te r
o f
th e
r e p a i r
jo b s
r e p a i r
len d
m a te r ia ls
o f
t h a t
is
jo b
w h o le — as
Th e
p a r t
com m odity
p u rc h a s e s ,
r a te
w ith in
fe a s i b l e
s o r t
r a te
s p e c ia l
as
r e p a i r
fo u n d
som e
D OD
a
p r ic e d .
Go v e r n m e n t
d e ve lo p
r e p a i r
be
th e
e xa m p le ).
as
te c h n iq u e :
r a t e — is
wage
fo r
in s te a d ,
DOD -p e r fo r m e d
t h i s
fu n c tio n
wage
b oth
by
c o n s tru c te d
recom m ended,
t r a c t o r
in
s p e c i fi c a t i o n
purchased
r e p a i r
c o s t— n o t
i n s t a l l
r e p a ir s
s e p a r a te ly
o f
to
in
com m odity
purchased
la b o r
is
o b se rve
p r ic in g
and
is
to
s p e c i fi c a t i o n --n o t
u n lik e
com ponentj
p a r t
p o in t
a
and
m ost
th e
209
pr act i cal
pr obl ems of adj ust i ng i nput pr i ce i ndexes by pr oduc t i vi t y
change t o der i ve a pr i ce ser i es cl oser t o end use,
and t he second c om
par i son woul d cont r i but e t o t he anal ysi s of pr i ce changes i n DOD- per f or med
t as ks. compar ed wi t h t he same ser vi ce on cont r act .
Au to m a tic
p ro b le m s ,
th e
be
is
tenanc e
to
im prove
s e r v ic e .
in
su ggested
above
m ig h t
ta k e
b asis
o f
w hole
area
been
f i e l d
d ata
is
one
o f
th e
p r ic e
r e c e ive d .
to
i t s
f i x e d ,
r e n ta l
(an d
w here
r e n ta l
th e r e
As
to
agency
has
in d e xe s ,
taken
in
p re p a rin g
im p o rta n t
o f
ADP
been
D OD
m easures
b u t
th e
to
o f
p r o
Th e
m ain
q u a l i t y
to
be
th e
m ethods
e va lu a tio n
p e rfo rm an c e
on
th e
s e r v i c e } !^ T h i s
o f
d e c lin in g
to
th e
i n t e r n a l l y .
e xp e r ie n c e ,
r e n t a l s ,
sh o u ld
s i m ila r
sa vin g s
s e r
c o n tr a c to r
e q u ip m en t.
th e
ADP
e ff e c t i v e
in c re as e d
g r e a t
th e
typ e
equipm ent
in d ic a tio n s
them
w ith
f o r
m anner
th e
t h a t
p a r t i c u l a r
in c re as e d
r e a p p lie d
on
ve ry
is
a
a
s e r v i c e s ,
based
p r o d u c t i v i t y
in
fo r )
h ave
no
be
ch an gin g
purchased
va lu e
ADP
o f
im proved
p r ic e
a d j u s t
pose
to
e xam p le ,
th u s
o f
I t
p r ic e
f o r
h an d ,
m odels
sh ou ld
a n o t h e r .S i m i l a r l y
r e n ta l
o th e r
new
r e n t a l s .
p ro c e ss in g
o f
o f
Se rvic e s
p re c a u tio n s
d e t e r i o r a t e ,
(e s tim a te d
t h a t
w here
qu oted
th e
fo r
ac c ou n t
in
such
m easure
•^ 4 e e
term s
c o s t
h ou r
o r
som e
p e rio d
rem ain
On
e va lu a te d
one
th e
to
a re
(ADP)
s e r vic e
from
fo r
equipm ent
p er
th e
com parable
p o s s ib le
th e
th e r e
o f
c e ssin g
o f
Pr o c e s s in g
a lth o u g h
d e s c r ip tio n s
vic e
i t
Data
c o u ld
d e t e r m i n e .m o r e
Ar m y
Th is
be
c o s ts
is
used
c lo s e ly
h ave
a n o th e r
w ith
a
e ffe c tiv e n e s s .
Ch a p te r
I I I :
Pr ic in g
in
Ge n e r a l,
Se c tio n
C
on
Q u a l i t y
Ch a n g e .
210
Th e
c a te g o ry
a c t i v i t i e s .
c ie s
in g
and
a
w ay.
and
to
o f
under
d e fin e
s a ry
to
a
is
D OD
s e r vic e
p e r tin e n t
to
D OD
"p u rc h ased "
c o ve rs
a
o th e r
c o n tr a c to r s .
Fr o m
th e
p r e fe r a b le
t r e a t
poses
o f
and
com ponents.
s e r vic e s "
from
d is c u s s io n
ty p ic a l
p r ic e
i t
w ith in
th e
are
p r i v a t e
in d e x ,
("Pu r c h a s e "
purchased
th e se
from
p r ic e
ag ain
a re
So m e
o th e rs
DOD
" o th e r
Bu t
a n o th e r
s to c k
p r ic e
in
e xp e rie n c e
to
i t .
any
e v e n t,
sh o u ld
An
be
th e
g overnm ent
th e se
Fa i l i n g
v a r i e t y
o b j e c tiv e
q u e s tio n ,
f u n d s .)
w ide
b oth
t h i s ,
use
o f
i t
sam e
e a r l i e r
sh ou ld
be
m ay
nec es
p ric e s
em ployed, r a th e r
o b ta in
th e
d isc u sse d
a tte m p t
agen
o f
in
o f
be
m ade
w hich
th an
p ro xy
s e r i e s .
An
th e
m edic al
a tte m p t
o f
a re a
o f
c are
sh ou ld
r e s o r t .
p r ic e
Un ifo rm e d
m ade
fe e s ,
He re
m easures
d ata
m ust
sh o u ld
(DSA)
be
and
p ro b a b ly
m ore
r e fe r
and
le s s
developm en t
proceed
in
a
( C i v i l i a n
be
to
th e
Fo r
D OD
o f
and
and
sam p les,
r e l a t i v e l y
to
s im p ly
e t c .,
w here
M edic al
p r i v a t e
be
a g a in ,
th e
e xc e p t
D OD
p lan s
m e a n in g fu l,
p ric e s
as
a
based
Pr o g r a m
h e a lth
th e
o f
o f
th e
as
to
c o u rs e ,
Eq u i p m e n t
M a te r ia ls
p r i c i n g ,
a c c e s s ib le
o f
w ith
t h i s
d r u g s ,
and
s t u d y ,i s
He re
n o t
s i t u a t i o n
to
e xp e rie n c e .
M a te r ia ls
Su p p lie s
a
He a lth
com pared
r e s u l t s .
i n s t i t u t i o n
o r
b e n e fi t ,
o f
p r ic e
im m ediate
s ta n d a rd
exam ple
m ig h t
c a te g o ry
a
am enable
s e r v ic e s .
a n o th e r
in fo r m a tive
Su p p lie s
purchased
c h a rg e s ,
w ith
f o r
p r ic e
CHAM PUS
Se r vic e s )
Th e
to
o th e r
be
s e r vic e
is
fo r
o f
sh ou ld
h o s p ita l
tre n d
2*
i n t e r e s t ,w h i c h
segm ent
be
p h y s ic ia n s '
l a s t
c u r r e n t
in
second
GS A
o r
o ffe r s
to
th e
th e
b e s t
p e rs o n n e l.
De fe n se
s p e c i fi c a t i o n s ,
s tr a i g h t -fo r w a r d
and
Th e
Su p p ly
p r ic e
m anner.
o p p o r tu n ity
rec ord s
Ag e n c y
d ata
c o u ld
Alth o u g h
211
equipm ent
valu ed
purc hases
equipm ent
h i b i t
V I 1- 8
loom
$ 1 ,0 0 0 )
th e
c la s s e s
o f
m a te r ia ls
show s
19 7 1^ / Ap p e n d ix
fo llo w in g
com plem ent
m edical
to
" Th e
V I I -B
a
a ls o
and
based
on
show s
d e t a i l ,
o r
by
a re
th e
m edical
g ib le
as
lo g ic a l
a
in c lu d e d
s u p p lie s ,
s tu d y
advan c es
o f
by
On e
c re a s in g
t i v e l y
can
th e
in
as
Fe d e r a l
lo w
0&M.
w e ll
De p artm e n t
Su p p ly
Ex
as
th e
o f
th e
C l a s s i f i
s ta b le
'M i l i t a r y
j Z^ b i d ,
in
page
p r ic e s
Pr ic e
2 11.
re fe re n c e
o f
(a t
In d e xe s ,
Th e
to
FY
m arked
e xp e rie n c e d
by
a
In
a
o f
tim e
19 73 ,
o f
th e
th e
w hich
Ar m y
Th e
r e l a
m edical
d e ta i le d
i n f l a t i o n
a
e n d -u s e
te c h n o lo g ic a l
and
m edical
th e
p r o
advan c e
a n a ly s is
o f
(h a s
been)
n e g l i
i t e m s ...( b u t
t h a t )
te c h n o
m a rk e t)
a re
th e
re a l
cause
o f
!'— 1
o p e r a tin g
b e t t e r
Ar m y
th e
Su p p ly
s im u lta n e o u s ly :
d r u g s ;
anyw ay)
fro m
M ed ic al
th a t
by
as
in
g ro w th .
th ro u g h o u t
th o ro u g h
s u p p lie s
and
c o s t
c o n s id e ra b le
c on c lu ded
q u o ta tio n
TSG,
e i t h e r
elem en t
fo r c e s
t h a t
Ge n e r a l,
one
e n te r in g
new er
in
re p re s e n ts
in c re a s e s
a v a i l a b i l i t y
Pr ic in g
p r ic in g
i n t e r e s t
s e r v ic e s .
p r ic e
s e ve ra l
o f
and
TSG
m edical
is
o f
e xp e rie n c e d
b ein g
item s
III
s tu d y
p ro d u c ts
a r e a ,
o f
d e te c t
o f
h o w e ve r,
(n e w
Ar m y
exam ple
s u p p lie s .
in
c o s t
an
n o t
th e
Ch a p te r
s u p p lie s
le v e ls
s u p p lie s
fa c t o r
in
as
has
m edical
in c r e a s in g
was
w hich
o f f s e t ,
o f
fro m
purc hases
m edical
p r ic e
b ein g
use
d is c u s s io n
a c tu a l
o f
s ta b le
o b s e r va tio n
d isc u s se d
program
t i v e l y
—
was
area
m edical
th e
th e
c are
(r e s u l t s )
i t s
c a te g o r ie s ,
are
a p p r o p r i a ti o n ,
Co d e .
Th e
in
proc urem ent
th an
Ar m y
gram
th e
(le s s
equipm ent
c a tio n
in
item s
s m a lle r
in
la r g e s t
o f
item
Budget"
Su rg e o n
Co s t
(b )
(a )
r e p o r te d ly
p r i c e s ;
i n
r e l a
and
o p .c i t .
G e n e r a l 's
Stu d y ,
Ju n e
a n a ly s is
2 1,
19 71.
212
EXHI BI T VI 1- 8
OPERATI ONS AND MAI NTENANCE
Maj or Mat er i el
Gr ound Suppor t
Cat egor y
Equi pment
Medi cal - Dent al
( Suppl i es)
( Equi pment )
Tact i cal
Gener al
& Suppor t Vehi cl es
and I ndust r i al
Suppl i es
Cl ot hi ng & Text i l es
El ect r oni c Mat er i el
Ai r c r af t Mat er i el
Mi ss i l e Mat er i el
Weapons,
Smal l
Ammuni t i on,
Ar ms & Fi r e Cont r ol
Mi ssi l es & Chemi cal
Component s
POL ( Pet r ol eum, Oi l , Lubr i cant s)
( Ai r cr af t POL)
( MOGAS)
( Di esel )
Subs i s t enc e
Sour ce:
' ' Mi l i t ar y Pr i ce I ndi ces, FY 1973 Ar my Budget , ' 1 Of f i ce of t he
As si st ant Di r ect or of Ar my Budget f or Resour ces, Oct ober 1971.
213
( c) t echnol ogi cal
advance br i ngi ng wi t h i t mor e ef f ect i ve t r eat ment .
The f i r st of t hese,
newer dr ugs,
ur ed by convent i onal
i ncr eases cost but not pr i c e, as meas
pr i ce i ndexes because new i t ems ar e " l i nked"
i nt o
As
t he i ndex wi t hout al l owi ng quot ed pr i ce change t o af f ect t he i ndex.
a mat t er of f act ,
i nt r oduct i on of
new dr ugs t oo ear l y coul d cause an un
war r ant ed decr ease i n t he pr i ce i ndex,
si nce pr eci pi t ous decl i nes i n
pr i ce usual l y ac company l ar ge i ncr eases i n pr oduct i on vol ume.
f or c e__r ei at i vel y st abl e pr i c es — woul d,
pr i ce i ndexes t o f ol l ow a st abl e t r end.
of cour se,
The second
cause t he convent i onal
But t he t hi r d poi n t - mo r e ef f ec
t i ve t r eat ment — woul d cause a decl i ne i n a pr i ce i ndex or i ent ed t owar d
pr i ci ng a cur e r at her t han a pi l l
was di scussed ear l i er and wi l l
or a day i n t he hospi t al .
not be expanded her e.
Thi s appr oach
I t seems unl i kel y
t hat pr i ci ng ei t her an " ounce of pr event i on" or a " pound of cur e" wi l l
be pr act i cal .
r epai r , q. v. )
t est
I t may be t hat a mi d- gr ound coul d be at t ai ned ( as i n aut o
and t hat DOD i s i n a good posi t i on t o pr oduce exper i ment al
i ndexes on t hi s subj ect .
The r eader wi l l
r ecogni ze t hat t he es t i
mat es of such i ndexes can come by means of t he convent i onal
dexes of medi cal
goods and ser vi ces pur chased,
pr i ce i n
adj ust ed by a meas ur e of
pr oduc t i vi t y ( based on t r eat ment s per man- hour ,
per haps)
or mor e di r ect l y
by means of at t empt i ng t o cost a st andar d t r eat ment over t i me.
The pr i ci ng of oi l
t wo cont ext s:
( a)
pur c hased by DOD has come t o t he f or ef r ont
t he ef f ect on pr i ce ( and pr i ce i ndexes) of pur chases
at pr i ces above t he mar k et
t o at t ai n a pol i t i cal
( or di pl omat i c)
t i ve and ( b) t he changi ng ef f ect of pur chases f r om di f f er ent
t he wor l d,
in
oc casi oned by mi l i t ar y exi genci es.
obj ec
ar eas of
2 14
The poi nt of vi ew t aken i n t hi s r epor t
has been t hat j udgment of
whet her qual i t y has changed or an ext r a benef i t
be made on t he basi s of t he POD mi s s i on.
has been r ecei ved shoul d
Ther ef or e,
how t o handl e hi gher pr i ces owi ng t o envi r onment al
t he benef i t
ment
necessi t i es hi nged on
t o DOD i n f ol l owi ng t hr ough on i t s goal .
r equi r es t hat t he pur chase of oi l
f ur t her a nat i onal
pol i t i cal
t he di scus si on of
A cons i s t ent
f r om a hi gh- pr i ced sour ce t o
obj ect i ve be t r eat ed as a pr i ce i ncr ease
f or i ndex pur poses no mat t er how wor t hwhi l e t he mot i vat i on.
cons i s t ent wi t h t he devel opi ng concept
at
t he Per si an Gul f
veni ence,
t hat pur chase of oi l
( as ex pl ai ned by DOD sour ces)
at l ow pr i ces
f or t he sake of con
f or i ndex pur poses,
On t he cont r ar y,
shoul d
as a t r ue pr i ce decr ease and no upwar d
adj ust ment , made f or ei t her t he i nf r equency or unusual
pur chases.
I t seems
whi l e t he Uni t ed St at es was engaged i n t he Vi et nam War ,
be t r eat ed,
t r eat
nat ur e of such
i t coul d be ar gued t hat t he pr i ce shoul d
not onl y show t he quot ed decr ease,
but an addi t i onal
decr ease r ef l ect i ng
an ext r a benef i t - c onv eni enc e i n car r yi ng on DOD' s mi ssi on.
Thi s woul d
be wi t hi n t he concept .
Ther e ar e ot her unusual
of Def ense has pur chased oi l
or speci al
ci r cumst ances.
under " di st r essed pur chase"
The Depar t ment
condi t i ons,
wher eby pur chases of sur pl us amount s ar e made at pr i ces l ower t han mar
ket .
These pr i ces,
t oo,
ar e act ual
pr i ces, and no adj ust ment
shoul d be
- ^ o r pur poses of f or ecast i ng or pl anni ng f ut ur e budget s i t woul d, of
cour se, be pr oper t o omi t such pr i ces or t o make an appr opr i at e ad
j ust ment , i f t he gi ven condi t i ons seem unl i kel y t o r ecur .
215
3.
Tr anspor t at i on of Thi ngs
Thi s cat egor y i ncl udes a di ver s i t y of t r anspor t at i on pr ovi ded
by DOD i t sel f as wel l
as commer ci al l y pur chased t r anspor t at i on.
t he concept s r ecommended, i t
seems pr oper t o omi t
Under
t he DOD f ur ni shed t r ans
por t at i on £er se and i nst ead conf i ne pr i ci ng t o i t ems and ser vi ces pur
chased f r om t he out si de wor l d t o pr ovi de t he t r anspor t .
pur chased t r anspor t at i on,
on t he ot her hand,
For commer ci al l y
t her e shoul d be av ai l abl e
suf f i ci ent dat a on f r ei ght r at es f r om t he r ecor ds of t he Mi l i t ar y Tr af f i c
Management and Ter mi nal
I n t hi s r egar ct
Ser vi ce ( MTMTS) .
t he concept s
and r esul t i ng met hodol ogy now bei ng i ni t i at ed by t he Bur eau of Labor
39/
use. — ■'
St at i st i cs may be of
" The conc ept under l yi ng t r anspor t at i on pr i c i ng. . . must be del i neat ed
bef or e meas ur ement
begi ns . . . . Conf usi on on t hi s poi nt can l ead t o c on
I s t he uni t t he t on of pr oduc t
f l i ct i ng r esul t s t hr ough f aul t y measur es.
car r i ed?
Or t he t on- mi l e?
New Yor k t o Chi cago?
Or a t on- mi l e f or a speci f i c t r i p;
e. g. ,
Choi ce of t he uni t of meas ur e depends on t he degr ee
t o whi ch changes i n t r i p- mi x,
mi l eage- mi x
and pr oduct - mi x ar e t o be
al l owed t o af f ect t he i ndex. "
On t he act ual
meas ur ement t echni ques:
t o i mpr ov ement of r ai l
t r anspor t f r ei ght
" The most f r ui t f ul
appr oach
i ndexes woul d be t o r ei nst i t ut e
const r uc t i on and publ i c at i on of i ndexes based on dat a f r om t he I CC w ay
bi l l
s ampl e___ The FCC appr oach shoul d be i mpr oved,
i f possi bl e,
al ong
t he f ol l owi ng l i nes:
Al l an D. , and Mar y E. Lawr ence, Tr anspor t at i on Rat e I ndex es ,
Of f i ce of Pr i ces and Li vi ng Condi t i ons, Bur eau of Labor St at i st i cs,
U. S. Depar t ment of Labor , November 1970, unpubl i shed.
2 16
Fur t her ef f or t s shoul d be devot ed t o el i mi nat e t he ef f ect of
mi x" wi t hi n mi l eage bl ocks.
" t r i p-
One met hod woul d be t o modi f y t he waybi l l
sampl e sel ect i on pr ocess so t hat or i gi n and dest i nat i on i nf or mat i on can
be obt ai ned. "
Si mi l ar r ecommendat i ons wer e made wi t h r egar d t o mot or f r ei ght and
ot her f or ms of t r anspor t at i on.
The pr i nci pal
poi nt
t o keep i n mi nd f or POD pr i ci ng of c ommer c i al
t r ans por t at i on i s t o hol d t he t r i p and commodi t y speci f i c at i on const ant ;
i . e. ,
pr i ce t he ser v i c e of shi ppi ng a speci f i c commodi t y gr oup by r ai l
f r om one f i xed poi nt
t o anot her .
Rat es per t on- mi l e ( even by comnodi t y)
ar e not so sat i sf ac t or y because t he same number of mi l es bet ween poi nt s
A and B may command di f f er ent r at es t han bet ween poi nt s C and D.
Tr anspor t at i on r at es pr ovi de a cl assi c ex ampl e of t he need t o set
up a sy st em of DOD i ndexes based on Depar t ment of Def ense exper i ence.
The t endency t o use pr i ce t r ends f r om out s i de sour ces i s es peci al l y un
f or t unat e f or r ai l r oad r at es.
Fi r st ,
as wi t h ot her pr oduct s,
r at es may or may not r epr esent DOD exper i ence.
t he gener al
F u rtherm ore— and uni que
wi t h t r anspor t at i on r at es — t hi s i s an ar ea wher e t her e has been a de
t er i or at i on over t he past f ew year s i n t he pr i vat e- sour ce measur es.
1963
t he FCC l ast publ i s hed a mor e near l y val i d f r ei ght
Af t er t hi s was di scont i nued,
est i mat es,
ot her agenci es had t o r esor t
r at e i ndex.
t o cr uder
r evenues per t on- mi l e.
Si nce t hen t her e have been moves t o r egai n l ost gr ound,
and t he BLS
i s wor k i ng on an i mpr oved i ndex usi ng I CC waybi l l s as r aw mat er i al .
addi t i on,
In
t he U. S.
Depar t ment of Agr i cul t ur e,
In
Mar ket i ng Economi cs Di vi si on
217
publ i shes an i ndex of f r ei ght
r at es f or agr i cul t ur al
pr oduct s i n whi ch
speci f i c t r i ps ar e def i ned.
The above has deal t wi t h t r eat ment of t r anspor t at i on when separ at el y
pur chased f r om a commer ci al
car r i er .
Tr anspor t at i on char ges embodi ed
i n a pur chased pr oduct as par t of t he pr i ce ar e anot her mat t er .
Whet her
t o i ncl ude or excl ude t r anspor t at i on char ges f r om pr i ce has been di s
cuss ed i n Chapt er I I I ,
Pr i ci ng i n Gener al .
That chapt er poi nt ed out
t hat
ex cl udi ng t r anspor t at i on changes f r om pr i ce and ex pl i c i t l y br i ngi ng t he
char ge back i nt o t he i ndex as a pur chase of quant i t y of t r anspor t at i on
r esul t s i n a di f f er ent
t r eat ed as pr i ce.
di st ant
good;
sour ce,
i ndex f r om one i n whi c h embodi ed t r anspor t at i on i s
I n t he l at t er case pur chase of a good f r om a mor e
f or exampl e,
i n t he f or mer case,
woul d show up as a pr i ce i ncr ease of t he
as no pr i ce change but an i ncr ease i n quant i t y
pur chased ( goods pl us t r anspor t at i on ser vi ce) .
For t he pur pose of an i nput pr i ce i ndex f or DOD i t was r ecommended
t hat t he t r anspor t at i on char ge r emai n as par t of
t he pr i ce.
The r eason
was t o show a pr i ce change f or a commodi t y, whi c h woul d r esul t f r om a
cl oser sour ce of suppl y.
4.
Tr anspor t at i on of Per sons
Tr anspor t at i on of per sons shoul d be handl ed i n t he same
gener al
manner as t r anspor t of t hi ngs:
so t hat t he speci f i cat i on wi l l
The t r i p shoul d be st andar di z ed
descr i be t he speci f i c t r i p, r at her t han
mer el y dol l ar s per pass enger or passenger mi l e.
pr i ce dat a av ai l abl e i n t he CPI
Rat her t han use t he
f or pass enger t r avel ,
i t woul d be bet t er
t o use t he av ai l abl e dat a f r om t he DOD t r anspor t at i on of per sonnel
to
218
set up val i d pr i ce i ndexes.
Nor woul d use of DOD dat a on t ot al
cost ,
sol ve t he pr obl em of mi x - r ai l ,
di vi ded by passenger s,
wat er ,
e t c . Pe r
di em mi ght
t r avel
aut o,
ai r ,
be i ncl uded i n t he cost of a speci f i ed t r i p
pr i ce or handl ed separ at el y as f easi bl e.
5.
Rent ,
Communi cat i ons,
Ut i l i t i es
Change i n r ent of st r uct ur es coul d be measur ed on a sampl e
basi s,
choosi ng di f f er ent
r oundi ngs most
t ypi cal l y used.
st andar d t hr oughout
by f ar t he most
geogr aphi cal
DOD
l ocat i ons
f or bui l di ngs and s ur
The speci f i c at i ons woul d not need t o be
but shoul d be uni f or m ov er t i me.
pr act i cal ,
and
i s t o f ol l ow t he r ent of par t i c ul ar f aci l i t i es
y ear - by - y ear so l ong as pr act i cal .
t ai ns a br i ef desc r i pt i on of r ent
Chapt er
III,
Pr i ci ng i n Gener al ,
i n t he Cons umer Pr i ce I ndex,
t hought s on qual i t y change i nvol vi ng agi ng of f aci l i t i es.
however ,
One way,
Most
c on
i ncl udi ng
concept s,
pr obabl y have mor e appl i c abi l i t y t o cons umer i nt er est s t han t o
DOD.
As t o heavy dut y equi pment
r ent al s,
t he DOD may f i nd i t necessar y
t o devel op i t s own met hods, si nce ver y l i t t l e i s av ai l abl e t o pr ovi de
gui dance f r om ot her gover nment al
sour ces.
Pr i vat e sour ces,
i -P- . 9i neer i ng News Rec or d, may pr ovi de gui dance.
such as
Car e woul d need t o be
t aken t o assur e uni f or mi t y over t i me as t o use of t he equi pment r ent ed.
^ Wi n es t o ne , Rober t L. , i n A Mi l i t ar y Per sonnel Pr i ce I ndex , ci t ed
ear l i er , sai d ( page 33) : " Ther e i s anot her di f f i c ul t y at t r i but abl e t o
t r avel ; t he pr i ces of i t ems ar e comput ed f r om aggr egat ed t ot al s di vi ded
by t he number of i ndi vi dual s. "
The wr i t er f el t t hat " I t woul d seem
t hat mi l i t ar y t r anspor t at i on of f i ci al s woul d be i nt er est ed i n pr i ce
changes and woul d begi n t o bui l d a dat a base f r om whi ch bet t er pr i ces
coul d be obt ai ned. "
219
The r ent al
of ADP equi pment was di scussed above under t he t opi c
" ot her ser vi ces. "
Ut i l i t i es and communi cat i ons ser vi ces pur chased f r om publ i c ut i l i t i es
compani es pose ver y l i t t l e pr obl em.
The most sat i sf act or y pr ocedur e i s
It
t o def i ne a f ew st andar d bi l l s and pr i ce t hem each pr i ci ng per i od.
woul d,
of cour se,
not be sat i sf act or y t o use mer el y val ue per ki l owat t -
hour , der i ved by di vi di ng t he el ect r i c bi l l
hour s used.
For exampl e, a speci f i ed bi l l
" el ect r i ci t y,
aver age mont hl y bi l l
vat e, f or power t o i ndust r i al
use,
t hi s,
f r om t he WPI Pr ogr am r eads:
char ged by ut i l i t i es,
consumer s,
55. 6 per cent l oad f act or . "
by t he number of ki l owat t -
500 kw demand,
Nor mal l y,
t her e wi l l
publ i c and pr i
200, 000 kwh of
be no pr obl em wi t h
unl ess t he ent i r e r at e st r uct ur e of t he company- changes,
i n whi ch
event a l i nki ng adj ust ment must be made t o cover t he changeover per i od.
Thi s can usual l y be comput ed on a one- t i me basi s by combi ni ng enough
r at e bl ocks on t he ol d and new schedul e t o at t ai n compar abi l i t y.
Ut i l i t i es and communi cat i ons ser vi ces pr oduced by D0D i t sel f woul d
f al l
out si de t he pr i ci ng concept s cover ed by t hi s r epor t ;
t he goods and
ser vi ces used t o pr ovi de t hem woul d i nst ead be cover ed, as appr opr i at e,
el sewher e i n t he i ndex.
As i n ot her si t uat i ons wher e a por t i on of t he
goods or ser vi ces may be pur chased and a por t i on pr oduced, a speci al
i ndex may be desi r ed f or compar i son.
6.
Qual i t y Change
Ot her t han t hose ment i oned i n t he cour se of t he above di scussi on,
no especi al l y uni que qual i t y pr obl ems ar e appar ent .
goods ar e const ant l y changi ng.
As i n ci vi l i an mar ket s,
These speci f i cat i on changes shoul d be deal t
wi t h as pr oposed under t he t opi c Qual i t y Change i n Chapt er I I I .
Pr obabl y most
220
wi l l
be deal t wi t h on t he basi s of es t i mat i ng t he val ue of t hat par t of t he
quot ed pr i ce change t hat can be at t r i but ed t o t he changed f eat ur e,
basi s of cost mar ked up t o del i ver ed pr i ce,
on t he
r at her t han by means of hedoni c
adj ust ment .
G.
Pr oc ur ement
Thi s cat egor y of DOD appr opr i at i ons f i nances " t he acqui s i t i on of
capi t al
equi pment ,
vehi cl es,
muni t i ons;
use;
weapons,
such as ai r cr af t ,
t or pedoes,
mi ssi l es,
and communi cat i ons;
maj or i t ems f or suppor t of capi t al
t he i ndust r i al
shi ps,
combat and suppor t
ai r ,
gr ound,
equi pment ,
and shi p
when i t i s i n
f aci l i t i es necess ar y t o pr oduce t hat equi pment ;
maj or modi f i cat i on of equi pment
i n i nvent or y,
achi ev ed wi t hout buyi ng new equi pment .
and
wher e moder ni z at i on can be
The capi t al
equi pment . . . i s pr i n
c i pal l y pr ocur ed f r om pr i v at e cont r act or s or pr oduced i n Gover nment ar s e
nal s,
shi pyar ds,
and pl ant s. "
Pr ocur ement r epr es ent s t he l ar gest appr opr i at i on cl ass,
of mi l i t ar y per sonnel ,
account i ng f or about
excl usi ve
25 per cent of t ot al
DOD obl i gat i ons ( excl usi ve of r evol vi ng f unds) .
di r ect
Wi t hi n pr ocur ement ,
equi pment
i s t he l ar gest v al ue— 63. 8 per cent of di r ect obl i gat i ons i n
FY 1972.
Suppl i es and mat er i al s,
and 9. 2 per cent ,
t hr oughout
r espect i vel y.
t he ser vi ces,
and " ot her ser vi ces"
amount
t o 26. 2
Thes e pr opor t i ons ar e not cons t ant
however .
Equi pment account s f or onl y 32. 6 per
cent of t he Ar my budget but 62. 2 per cent of t he Navy' s and 81. 4 per cent
of t he Ai r
For ce' s budget ed di r ect obl i gat i ons.
On t he ot her hand,
suppl i es and mat er i al s ac count f or 45. 1 per cent of t he Ar my pr oc ur ement
and onl y 25. 4 per cent and 17. 5 per cent f or Navy and t he Ai r
For ce.
Much
of t he di f f er ence i n t he per cent ages i s due t o t he hi gh pr opor t i on of
ammuni t i on i n t he Ar my budget r el at i ve t o equi pment .
The i mpor t ant
221
budget cat egor i es,
suppl i es and mat er i al s and " ot her ser vi ces" have been
di scussed under " Oper at i ons and Mai nt enanc e. "
They wi l l
be omi t t ed f r om
t he di scussi on bel ow.
1#
Ge n e r a l
C h a r a c te r is tic s
I f t he pr oduct s i ncl uded under t he equi pment por t i on of t he
pr oc ur ement appr opr i at i on have one t hi ng i n common,
t y.
i t i s t hei r c ompl ex i
Fr om t hi s st ems t he r el at i vel y l ar ge number of model
changes and
speci f i c at i on changes ( compar ed wi t h t he so- c al l ed shel f i t ems or per s on
nel ) ,
t he l engt h of pr oduct i on t i me,
t he number of cont r act or s and s ub
cont r act or s and t he var i et y of component s and mat er i al s, whi c h make up
t he f i ni shed pr oduct s f i nal l y del i ver ed t o DOD.
Fur t her mor e,
some i t ems
ar e t r ul y uni que so t hat no pr i ce hi st or y can ev er be gat her ed i n t er ms
of t he f i ni shed pr oduct .
I n addi t i on,
many i t ems r equi r e cost l y pr o
gr ams of r esear ch and devel opment bef or e becomi ng oper at i onal
f easi bl e.
gr am.
The R&D aspect s of
t hese i t ems wi l l
The f ol l owi ng pages deal
t hr ough t he devel opment al
or even
be cover ed under t hat pr o
wi t h t he i t ems af t er t hey have pass ed
aspect s.
Many — t hough by no means not al l — of t he pr oduct s have no cl ose
r el at i ves i n t he ci vi l i an economy.
When t hey do have,
be i ncl uded i n c ur r ent ci vi l i an pr i ce i ndexes.
and met hodol ogy car r y over ,
The di scussi on wi l l
t he i t ems may not
However ,
t he pr i nci pl e
al t hough t he adapt at i on may be di f f er ent .
cover var i ous avai l abl e choi ces concer ni ng t he
met hodol ogy of adj ust i ng f or spec i f i c at i on or qual i t y change.
been cover ed i n consi der abl e det ai l
but wi l l
i n Chapt er I I I
be r ef er r ed t o bel ow, whenev er
necessar y,
Thes e have
on Pr i ci ng i n Gener al
t o poi nt
t owar d speci f i c
222
sugges t i ons as t o pr i ci ng.
cl ude act ual
di r ect i on.
pr i ci ng,
Whi l e t he scope of t hi s r epor t does not i n
ot her s have made some ser i ous ef f or t s i n t hi s
These deser ve at t ent i on.
A Look at Some Pr oduct s
2.
The budget pr ogr ams of DOD pr oc ur ement ar e shown f or FY 1972,
i n Exhi bi t VI I - 9.
I t must be r emember ed t hat t hese ar e pr ogr am, not
Obl i gat i on or commodi t y cl asses.
As a mat t er of f act , however ,
ac count ed f or by t he i t em ai r cr af t ,
ai r cr af t ,
as a per cent age of
t he val ue
t he appr opr i at i on
i s hi gh— near l y 88 per c ent f or Ai r For ce ai r c r af t and ov er 75
per cent f or t he Ar my.
For Ar my mi ssi l es t he per c ent age i s 48;
For ce near l y 100 per cent .
For shi ps,
t he commodi t y val ue i s near l y 70
per c ent of t he pr ogr am val ue. - ^- ^ As not ed above,
amount s t o about 64 per c ent of t ot al
Wi t h t he pr opor t i ons of
f or Ai r
t he equi pment val ue
DOD pr oc ur ement val ue.
t he var i ous pr ogr ams i n mi nd,
l et us t ur n
t o consi der at i on of pr i ci ng f or t he var i ous pr oduc t cat egor i es:
Ai r c r af t — Exhi bi t VI 1- 10 shows,
ac t i vi t i es of
t he Ar my ai r c r af t pr ogr am.
ai r c r af t pr ogr am of DOD,
and i nt er nal
41/
pur el y as an exampl e,
t he var i et y of
Whi l e t hi s i s not
t he f i gur es i l l ust r at e t he gener al
t he l ar gest
i mpor t ance
composi t i on of t he pr ogr am. ^ ?/
The per cent ages ar e est i mat es, based on t he r at es of equi pment obl i ga
t i ons t o t ot al obl i gat i ons.
Thi s i nvol ves t he assumpt i on t hat t he
ent i r e equi pment val ue i n t he ai r c r af t appr opr i at i on i s f or ai r cr af t .
■^ / n o at t empt has been made her e t o r econci l e t he f i gur es wi t h t he pub
l i shed out l ay or obl i gat i on f i gur es i n t he budget .
223
EXHI BI T VI I - 9— PROCUREMENT BUDGET PROGRAM
( i n mi l l i ons of dol l ar s)
Budget Pl an
Dol l ar s
Pr oqr am Ac t i vi t y
Per cent
Ai r cr af t
$ 6, 444. 7
34. 3
Mi ssi l es
3, 402. 6
18. 1
Shi ps
3, 010. 2
16. 1
428. 5
2. 3
5, 472. 0
$18, 758. 0
29. 2
100. 0
Combat Vehi cl es
Weapons, Tor pedoes
Ot her
Sour ce:
Budget of
t he U. S.
Gover nment ,
Fi scal
Year 1972
224
EX H I B I T
V IH O--ARM Y
A I R C R A FT
AND
( Fi s c a l
SPARE
Ye a r
PARTS
P R OG R A M
19 72 )
Valu e
Ca te g o ry
A i r c r a f t
and
En g i n e s ,
P a r t s ,
El e c t r o n i c s
Ra d io s
(M i l l i o n s
Air fr a m e
and
and
and
El e c t r o n i c
$
4 0 .8
Ac c e s s o rie s
2 5 .2
Co m m u n ic a tio n
Eq u i p m e n t
Co m p o n e n ts
5 .9
and
Ac c e s s o rie s
4 .9
Ar m a m e n t
3 .2
Co n tra c tu a l
and
M o d ific a tio n
Te s t
To o ls
No n -r e c u r r in g
In s t a l l a t i o n
Su p p o rt
2 2 .4
Co s ts
5 .7
Eq u i p m e n t
and
Sh o p
5 .8
Eq u i p m e n t
F i r s t -D e s t i n a t i o n
3 .2
Tr a n s p o r ta tio n
1 .3
TOTAL
So u rc e :
D o l l a r s )
Av io n ic s
o th e r
El e c t r o n i c
o f
M i l i t a r y
As s i s t a n t
Pr ic e
In d i c e s ,
D i r e c t o r
o f
FY
Ar m y
19 73
FT T K T
Ar m y
Budget
f o r
B u d g e t,
O ffi c e
Re s o u rc e s ,
o f
page
the
3 6 .
225
Th e
s a r y
to
te m s ,
and
l i s t i n g
d e c id e
w hich
th e
s e p a r a te ly .
a vo id e d
H .
and
w ith
(va r io u s
s e n tin g
W PI
used
e xp e rie n c e
r a te s
Th e
m etal
th e
in
tu r n
— / Cam p b e ll,
R-5 6 8 -PR,
H .
Th e
G .,
th e
th e
fro m
th e
Th e
r a t h e r
c o u n tin g
is
o f
o f
p r ic in g
m i l i t a r y
se c on d ary
so u rc e
f o r
p e r
c h an g es.
m a te r ia ls
w ith
th an
e a rn in g s
y e a r ,
overh ead
t o
fro m
a
a d ju s tm e n t
Ov e r h e a d
com pounded.
r a t e ,
y e a r
la rg e
to
e x te n t
Pr ic e
C o r p o r a tio n ,
o fte n
I n d e x e s ,"
De c e m b e r
U .S .
r e p r e
g en eral
d ata
w ere
com bined
f o r
a
c u r r e n t
19 70 .
s e r ie s
m ore
depending
th e
p r ic e
in d u s
th e
one
"a
A i r
as
t o
t h a t
th e
a t
t h i s
o f
la b o r
b u sin e ss
Fo r c e
overh ead
change
p e rc e n tag e
on
des
c o r r e c te d
c h an gin g
assum ed
as
In d e x
w e ig h ts
s t i p u l a t e s
s ta te d
y e a r
on
was
He
Pr ic e
a p p r o p r ia te
a n o th e r
an
e le c tr o n ic s
dou b le
W holesale
w o rk e rs
h o u r ly
o f
s p e c i fi c a ti o n s
e i t h e r
and
c o n s is t
s y s
w e ig h ts ,
use
com bined
p rod u c ers
nec es
o f
d i r e c tio n
t o
w ere
as
i s
c l e a r .
a i r c r a f t .
averag e
"Ae ro s p a c e
Ra n d
t r e a t
m ethods"
v a r ie s
depends
to
"c o n ve n tio n a l
p e rc e n t
r a te
w h e th e r
in d e xe s :
2 .5
la b o r
th e
lo n g
p ro d u c tio n
i n t o
o f
d is c u s s io n
a re
r e s o r t
p a r t
tw o
o f
average
as
i t
c om m unication
p rodu c ed
p r o d u c t i v i t y
"th e
o r
th a t
Ca m p b e ll
c o r r e c tio n s
and
o f
as
th e
in d exes
a i r c r a f t
f o r
e s tim a te
in
p ro d u c ts )
in d e x .
on
to
p r ic e
and
r a te
w hich
based
m ade
had
in p u t
Th e n ,
m a te r ia ls
above
been
B LS
o f
u n d er
re m in d e r
e le c tr o n ic s
a i r c r a f t
s p e c i fi c a ti o n s
e a rn in g s
and
th o se
a
a i r c r a f t ,
a b o ve ,
Ca m p b e ll
h o u r ly
th e
as
c o n c e p tu a lly ,
h ave
s i g n i f i c a n t
m e a s u r e ."
an
He
m e tals
th e
c rib e d
a
G.
p r o p o r tio n s .
w ith
on
c om pleted
p r i c i n g
s t a r t s
m a t e r i a l .— /
t r i e s
th e
se rve s
in c lu d e
in d ic a te d
th e
Se ve ra l
program
o f
s a t i s fa c t o r y
and
a i r c r a f t .
t o
i n s t a l l e d
As
i s
e le c tr o n ic s
w h e th e r
are
p r ic e
approach
o f
is
th e
b a s e ,
fo r tu n e s
P r o j e c t ,
226
o f
th e
i n d iv id u a l
e xp e rie n c e
q u a n t i t y "
fro m
f i r m ."
th e
change
w h ile
th e
o th e r
asp e c ts
W h ile
the
e s tim a te s
h im s e lf
com es
aerosp ac e
th e
fo rm
to
item s
p u b lis h e d
th ese
p r ic e
tre n d s
based
on
to
a vo id e d ,
be
th e
l i f t e r
s a id
f i r s t
u n t i l
be
and
based
on
he
t h a t
be
t h i s
t h i s
in d e x
o f
h o u r ly
A l s o ,
he
s e t
up
f o r
m ethod
o f
a tte m p tin g
19 6 1,
o f
t y p i c a l l y
(an d
l a s t
p re se n te d
Pr ic e
19 6 9 ,
th e n
th e
f e l l
s e ve r a l
le ss
p ro d u c e d .
overh ead
are
Ca m p b e ll
c o lle c te d
on
in fo r m a tio n ,
th a t
a
r e l i a b l e
tr e n d s .
to
e s tim a te
w hich
e s p e c ia lly
are
P OD
in p u t
them selves
a p p l i c a b l e ),
is
r e s o r t .
by
Sn yd e r
In d e x
30
h undred
10
and
showed
s e r ie s
n e a r ly
th an
e s s e n t i a l l y
p r i c i n g .
d ata
overh ead
n o t
p ric e s
rem ains
fe e ls
th ese
to
" c o s t-
a d d itio n a l
h is
e a rn in g s
in p u t
Ca m p b e ll
the
on
p r o d u c t i v i t y ,
so u rc e
in d e xe s ,
was
o f
" i n s u f f i c i e n t
m i s l e a d i n g ."
a
th a t
asp ec ts
based
fro m
l i t t l e
fe e ls
se c on d ary
e xc e p tio n
s h o u ld
as
com es
th a t
p r ic e
19 5 3
a i r c r a f t
m ost
s u p p l i e r s 1 o u tp u t
e xc e p t
p ro d u c tio n
to
in g e n io u s ,
th e
be
r e a s o n s ,
th e
e ffe c t )
c o n te n tio n ,
m in im a l.
are
w ith
h is
th a t
Pr e s u m a b ly,
c o n c lu s io n
m ay
in d e x
from
are
in d e x
system
fro m
W hile
ye a rs
s h a r p ly
and
a d ju s te d
An o th e r
i n d e x .
th e
is
c a p a c i t y -u t i l i za t i o n
an
d ata
d a ta -g a th e r in g
Fo r
th e
o f
c u rve
e x i s t s .M /
a d ju s ts
m o d ifie d
f o r
p r o d u c t i v i t y ,
p rog ram ,
(le a r n in g
in d e x
a
to
a i r c r a f t
fu n c tio n
p r o d u c t i v i t y
As
com pared
a
c o n s is te n t
c o n s tru c te d
p e rc e n t
u n its ,
p e rc e n t
by
u n t i l
th o se
th e
r is e
Sn yd e r
19 6 6 ,
m a n -h o u r s
o f
w ith
p e r
Ca m p b e ll
d u rin g
rose
ow ing
m ore
to
a i r c r a f t
re q u ire d
f o r
are
th e
227
g r e a t
p r o d u c t i v i t y
a f t e r
19 6 6 ,
re p o rte d
t i o n
Th e
i t
to
as
p r o d u c t i v i t y
be
an
does
p r ic e
g a i n s .4 5 /
o u tp u t
seem
t o
r e l a t i v e s
f o r
F - l l l 's
in c lu d e ,
each
t y p e ,
tr e a ts
th e
p r i c e d .
I t
u n t i l
m ake
th e
r e p o r te d
sto p p e d
t h i s .
" fly -a w a y
as
th e
o f
is
C -5 's
speed
g ive n
th a t
m odel
d id
n o t
m ig h t
h ave
c o s t"
(fro m
th e
a v a i l a b l e ) .
Pr ic e
speed
i t
as
and
as
fa c t o r
to
Co m p tr o lle r )
in c lu d e d
c o s t
by
o f
T h i s ,
o f
as
new
e xc lu d in g
w hich
in
e f f e c t ,
p lan e
d id
change
p r ic e
a i r c r a f t
th e
o u tp u t.
q u a n t i t y
c om p ilers
Th e
o f
p u rc h a s e d .
fo llo w
w a r r a n te d .
u n i t
w e ig h ts ,
u n i t
is
in fo r m a
( i .e .,
sp e e d .
Th e
fe a s i b l e
been
u s in g
course
in d e x
a v a ila b le
tr e a te d
c h an ge.
Th is
d e fin e d
th e
one
w ere
upw ard
a i r c r a f t
com bined
w e ig h t
m odel
as
s p e c i a l l y
(p o u n d s )
changes
fi n d
fro m
fixe d -w in g
and
to
a
sh arp
V I I - 1 1 ) .
Ju d g i n g
w ere
w e ig h t
i t s
t y p e s ,
n o t
go
o rd e rs
d a ta
typ e
used
(a n d
c om m unications
and
w ere
by
system
p la n e .
An
is
i t s
( Ex h i b i t
o f
va r io u s
to
resum ed
i n d e x .
p r ic e
d e s ig n a tin g
Th e y
a d ju stm e n ts
m odel
on
i s
D OD
beyond
c o m b in atio n
Re c o g n itio n
p r ic e
th e
fro m
in d e x
s u ffe r e d
m easure
h e lic o p te r s )
f o r
His
th e
im p o rta n t
ten d en c y
o f
b u sin e ss
t a r y
a i r c r a f t ,
fro m
c o m p a n y -to -c o m p a n y ,
—S n y d e r ,
h ave
no
J r .,
p lac e
when
c i v i l i a n
A n a l y s i s ),
May
o f
19 71.
w ith
i n d e x --fo r
s i ze a b l e
m ore
use
overh ead
s l a c k .
p a r t i c u l a r l y
s in c e
th o se
th e
L .,
do
t h i s .
" Pr o b le m s
A s s i s t a n t
I t
w ith
t h a t
Pr ic e
o f
in
w ith
p r o j e c t i o n —
c i v i l i a n
p r ic e s
Th is
seem s
Se c r e ta r y
b u d g et
o f
c o s t
grows
to
in
volum es
b u sin ess
Ch r is to p h e r
O f f i c e
th e
r e l a t i v e l y
o p p o r tu n ity
P l a n n i n g ,"
o f
com panies
t a r y
b u sin e ss
t o
l i m i t a t i o n
and
o f
ten d en c y
l i t t l e
f o r
In d ic e s
Defen se
m i l i
m i l i
va r ie s
c i v i l i a n
o r d in a r y
in
De fe n s e
(Sys te m s
228
EXHI BI T VI I - 11
COMPARISON OF COST AND PRICE INDICES
FOR MILITARY AIRCRAFT
. 1965 « 100
l
1140
IPO
J.
100 ...
80
60
ho
1950
Sour ce:
1
if e
“
if e T
19^5"'
Chr i st opher L. Snyder , Jr;., Pr obl ems wi t h Tr i ce I ndi ces i n Def ense Pl anni ng,
Anal ysi s) May 20, 1971, p. 9.
.
'
'
197k
OASD ( Syst ems
229
purposes
be
a
i t s
i ze d
o r
c a u se .
t y p i c a l
persons
d ata
to
e n g in e s ,
en g in es
in d e x
one
tio n s
to
s i o n ,
Ch an g e .
o th e r
w h at
a
on
th e
s e r i e s ,
va lu e
d e c l i n e ,
by
and
Sn yd e r
th a t
w ould
I t
p rove
Ro s s i,
A i r c r a f t
Ja m e s
and
r e q u ir e
A .,
s ta n d a r d
i n v e s tig a te
s o u g h t.
com pany
o u tp u t
and
t h r u s t
f o r
a i r c r a f t
and
r e s p e c tive
q u a n tity
f i g u r e s .
in
19 6 4 ,
n o t
in d exes
D OD
(w h ic h
use
o f
t o t a l
used
as
t h e i r
appears
o f
a re
f o r
Th is
1 9 6 1 .^
use
speed
d e sc rib e d
p o s s ib le
th e re
I n d u s t r y ,"
a
w h a t
tr e n d — is
M aking
m ore
m ay
be
d ata
in
to
c h a r a c te r is tic s
im p o rta n t
o f
e xp e rim e n ta l
p lan es
to
i f
n o t
d is c o n tin u e d .
q u a n t i t y
th e
w ou ld
d a ta ,
a t
to
an
be
a tte m p t
a ir fr a m e
l e a s t
th e
w e ig h t
ap p ro xim a
c h a r a c t e r i s t i c s .
m ethod
m ig h t
was
enough
p r ic e
a b le
t h i s
h i s t o r i c a l l y ,
re a l
in d e xe s
s t a f f .
w e ig h t
be
n o t
s t a r t i n g
th e se
fo llo w e d
s tu d y
f o r
by
b u t
am ong
b oth
th e
d e f l a t i o n ,
n o r m a l i ze d
p r ic e
d a ta
be
w ere
w e ig h t
o f
and
and
c o n s tru c te d
h e d o n ic ,
m ore
in d e x
and
c o u ld
s t r u c tu r e — a
p ro m is in g
r e la tio n s h ip s
— / De i
l i m i t a t i o n
a ir fr a m e
p e rfo rm an c e
th e
th e
p e rfo rm an c e
m ethod
o r
change
d is tin g u is h
d o ),
f o r
A
and
shows
m ost
n o t
th e
Ro s s i
d evelop ed
does
s h o u ld
d i v i d i n g
¿Is o
m ade
Pr ic e
w o rk in g
De i
Th e
a n a ly s is
B u t
t o t a l
by
m easurem ent,
p r ic in g
im prove
Usin g
is
p r ic e
l i m i t a t i o n .
e ve r
Th e
o f
Ch ap te r
use
in
a
c h a r a c t e r i s t i c s .
"M e asu rin g
Pr ic e
Th e
d a ta
e f f o r t
I I I ,
on
u n i t
I f
and
Ra n d
c o s t
t h i s
w ould
Se c tio n
w e ig h t,
re g r e s s io n
betw een
RM -5 8 0 5 -PR,
and
changes
be
Pr o d u c t i v i t y
C o r p o r a tio n ,
C.
speed
a n a ly s is
c o u ld
be
to
by
th e
on
r e g r e s
Q u a l i t y
and
s e ve ra l
d e te rm in e
typ e
o f
d e ve lo p e d ,
Ch a n g e
A p r i l
in
19 70 .
p lan e
i t
th e
230
w ou ld
to
be
s u p e r io r
r e ta in
and
th e
c o s ts .
to
th e
Sn yd e r
assum ptions
A l s o ,
m ethod
because
o f
p r o p o r t i o n a b i l i t y
in
o th e r
be
to
changes
a t t r i b u te s
i t
w ou ld
betw een
c o u ld
n o t
be
n ec e ssary
w e ig h t-a n d -s p e e d
be
e n te re d
i n t o
th e
e q u a tio n s .
An o th e r
w ith
th o se
c h oic e
w ou ld
w hich
h ave
a tte m p t
to
p lac e
a
On e
to
l i m i t
th e
w ay
t h a t
w i l l
w hich
be
as
a llo w e d ,
to
and
c lo s e ly
w ith
i n i t i a l
p ro ve
a t
t h i s
o f
th e
a
Bureau
k in d
o f
o f
be
as
f i e l d
o f
b u t
o f
i t
th e
i t s
p r ic in g
Based
new
to
f o r
a
be
and
w ou ld
t h i s
d ata
n u nfc er
be
s t a r t i n g
o f
and t o
y e a r s ,
change
typ e
t h i s
w ay
c h a n g e -o r d e r s
w ould
be
e t c .,
system
r u le d
w ou ld
w ith
t h i s
m igh t
b u t
no
in
in
th e
changes
o u t .
Su c h
d oubt
m in d .
r e q u ir e
a u d ito r s
consum ing,
o f
o r d e r s .
th e
s p e e d ,
be
Th e
w o rk in g
i n d u s t r i a l
system
p l a n t s .
c o u ld
e s ta b lis h e d .
sam ple
n a tu re
c an n ot
c a n .
has
Th e
w orkeid
both
h e lp fu l
e xp e r ie n c e ,
Se c tio n
c o u ld
a i r c r a f t ,
upon
be
d eterm in ed
Ec o n o m i c
c lo s e ly
C.
be
and
above
m ade
and
i f
on
fe a s i b l e
u n t i l
D OD
c o n c e rte d
Pr o g r a m
d a ta
o ve r
k nowl e dge as t o
f o r
De fe n se
s c i e n t i f i c
s a m p lin g ),
p r e c is e ly
Gr o w t h
w ith
a c ons i de r a bl e ba c k gr ound of
has
(s e e
o f
s i g n i f i c a n t
In
r e s id e n t
S t a t i s t i c s
on
a
a n a l y ze d
tim e
becam e
f o r
m ore
p r ic in g
p ro ve
typ e s
e xam p le ,
w ou ld
up
few
d ec id e
c a p a c ity ,
g e n e ra l
and
th e
change.
n e c e ssary
La b o r
ye a rs
to
be
agen ts
c o u ld
a f t e r
on
q u a l i t y
s e t t i n g
e s ta b lis h e d
c o n tr ib u tio n
w ou ld
c a r r y in g
phases
tim e ,
Pro c u re m e n t.
can
D OD
n a tu re
p e r io d
w h at
o f
w o rk ab le
Th e
jo b
a
p ro d u c tio n
va lu e
c h a n g e -o r d e r s
stag e s
in
c o n ve n ie n c e ,
s a fe t y ,
i n i t i a l
Th e
d o l l a r
d e fin e d
p e r ta in
fa c to r s
been
sam ple
th e
e f f o r t
sam plin g
g r e a te s t
w ere
d evoted
23 1
to
10 -12
t h i s
item s
m ig h t
e xam p le ,
be
each
are
d ata
breakdow ns
by
e q u ip m e n t.
Co s ts
are
w ou ld
g r e a t
h e lp
be
o f
c on c e rn in g
t i o n
w ith
a u d it
B LS
th e
C.
Pr ic e
In
begun
on
f o r
In d e x
b a s ic
w ere
fr a m e ,
f o r
o f
to
e a c h .
t h e i r
s i m i l a r
w hich
Th e
a s s i s t
in
s e tt i n g
has
been
Th e
m ethod
a u to m o b ile s
(Ap p e n d ic e s
I I I
A
a i r c r a f t
up
w e ll
o f
c o u ld
encom pass
th e
m ethod
w e ll
as
as
e v a lu a tin g
need
g r e a te r
f o r
th e
th e
m easurem ent
m ore
m is s ile s
o f
s i g n i f i c a n t
p r ic in g
was
fa rm
va lu e
o f
o ffi c e r s
know ledge
tn
use
connec
th e
d i f fe r e n t
f i e l d
B LS
s o u r c e ,
e l s e w h e r e .4 1 /
in
p roc ed u res
Ch a p te r
w e ll
be
f o r
I I I ,
p a tte r n e d
equipm ent
in
th e
on
th e
W hole
B ) .
c ou ld
c o n tr ib u tio n s
to
s p e c i fi c
m igh t
m easurem ent
r e l a t i v e
a
p re se n te d
and
and
h e d o n ic
fro m
Fo r
c o n tr a c t
va lu a b le
s u g g e s tio n
view
c om m unication
d e ta i le d
be
d isc u s se d
. — '1
c h osen
a d d i t i o n ,
p r o p o s a l,
t h e i r
e l e c tr o n i c
s h o u ld
R& D
p r ic in g
and
In
d e l i v e r e d ,
i n t i m a t e ,
on
Ch an g e .
num ber
In
s tu d y
ad ju stm en ts
p r ic in g
on
en g in e
a d ju s tm e n ts .
a
c a r e fu l l y
i n v o lv in g
c h an g e,
b u ild
o u tp u t
o f
to
p r i c e s .
by
a t t r i b u te s
change
e xp re sse d
a lre a d y
a
s t a t i s t i c a l
to
p r ic e
m eans
o f
s p e c i f i
changes
by
th e
by
s p e c i fi c a t i o n
a ls o
w ork
Sim u lta n e o u s ly
d eterm in e
va r io u s
p r ic e
upon
b u t
view ed
as
m ore
o f
much
d i f f i c u l t y .
" Ex p e r i m e n t a l
Ye a r s
a i r c r a f t
e l e c t r o n i c s .
DOD,
th e
4 7 / Th e
F-4
because
Q u a l i t y
re g re s s io n
c a l l y
f o r
a v a ila b le
gu id e
sum m ary,
in
program
item s
N S F- B LS
q u a l i t y
p roc ed u res
s a le
^
th e
d e ta i le d
Se c tio n
th e
r e -e n fo r c e s
in
and
i f
q u a lity -c h a n g e
f o r m a l i ze d
m aking
sh ip s
m o d ific a tio n s — know ledge
system
A
a i r c r a f t ,
p r a c t i c a l ,
th e re
c o n t r a c t ,
o f
In p u t
1 9 6 1 - 6 5 ,"
o p .
Pr ic e
c i t .
In d exes
f o r
Re s e a r c h
and
De ve lo p m e n t,
Fi s c a l
232
c o n ve n tio n a l
m ethod.
Th e
re g re s s io n
t h e o r e t i c a l l y
p ro vid e s
a
r e q u ire s
m ore
d a ta
m any
Th e
can
l a s t
e va lu a te d
p ro vid e
as
p la n n in g
th e y
f o r
o c c u r ,
phases
in d u s tr y
m ore
c l a s s i f i e d .
th e
r a th e r
n a tu re
o f
m ore
o f
d ata
than
p r o m p tly ,
th e
On
th e
s in c e
h e d o n ic
" a f t e r
approaches
m ore
s o l u t i o n .
p ro d u c ts
w hereas
b oth
Fo r
t h i s
m any
th an
Th e
i t
th e
s h o u ld
and
th e
h a n d ,
o th e r
o fte n
A t
can
be
re q u ire s
l e a s t
p u rs u e d ,
i t
syste m .
c h a n g e -o r d e r s
m ethod
be
a p p e a lin g
c o n ve n tio n a l
f a c t ."
p ro c e s s ,
Co n s tr u c tio n
th e
f o r
p e rim e n ta l
s tu d y
w ork
by
De i
p r ic e s
w ages
la b o r
— ^ e i
in p u t
and
Re s o u r c e
Sys te m s
re a d e r
o f
is
one
in
t o
th e
check
on
f o r
a
has
m arg in al
Ja m e s ,
and
In d u s tr y
Managem ent
Co m m a n d .
e t c .,
a l l
a ls o
are
to
c o n s tr u c tio n
i t
is
s t a r t
p r o c e s s ,
m o d ific a tio n s
n o rm a lly
and
th e
to
p o in ts
o f
I
c o m p le tio n ,
changing
o c c u r
Se c tio n
u n d e r w r itte n
m easurem ent
m eans
p r ic e
is
w here
betw een
p ro d u c tio n
th e
d u rin g
th e
s i m i l a r i t y .
on
M i l i t a r y
com m ents.
tow ard
a
span
r e fe r r e d
De fe n se
as
i n t o
d e r ive d
R o s s i ,
th e
h e te r o g e n e ity ,
in d e xe s ,
b u i l d i n g — An
tim e
Ro s s i,^ / p r e s e n t s
fu n c t i o n ,
and
lon g
o f
resem bles
m a n u fa c tu r in g ,
p r o c l i v i t y
lo o k in g
p ro d u c tio n
m ost
stag e s
p e r tin e n t
De p artm e n t
s h ip b u ild in g
resem bles
r e l a t i v e l y
d i s t i n c t
reason
Th e
re s p e c ts
o p e r a tio n s ,
p ro d u c tio n
to
m ore
is
o th e r .
S h i p s --I n
On e
e le g a n t
answ ers
c o l l e c t i o n
e xp e rim e n ta l
th e
f o r
m ore
m ethod
to
a
m ethod
p u ll
in d e x .
a vo id e d
p ro d u c t
W illa r d
W.
A n a l y s i s ,"
C o r p o r a tio n ,
by
th e
u n d e rtak e n
o f
p r ic e
tre n d s
o f
u s in g
th e
to g e th e r
Th e
o f
and
use
la b o r
o f
and
o f
o f
la b o r
Sm ith , " P r i ce
In d ic e s
RM C
Do c u m e n t,
Ju n e
Re s e a r c h
19 6 7,
p re p are d
s h i p s .
m a te ria ls
p ro b le m ,
m easures
u n i t
f o r
e x-*
Co b b -Do u g la s
in d exes
p r o d u c t i v i t y
som e
f o r
f o r
com m on
c a p i t a l ,
c o s t.
Th e
U .S .
Sh ip
RD-0 0 2 ,
Na val
Sh ip s
233
s h ip b u ild in g
p ro d u c tio n
duces
in p u ts
to
th e
s h ip
was
d u c t
o f
l a b o r ,
u n i t
o f
la b o r
wage
by
l a b o r 's
c o s t
in d e xe s
in d e x .
use
o f
t h e m .5 2 /
p r i c e s ,
based
d ec rease
t i o n
to
o f
th e
th e
Th e
q u ac ie s
o u tp u t
are
d e s c rib e d
— 4 i F f r f ,* G .
in
H .,
m atin g
f o r
se n te d
a t
Th e
by
c h an gin g
n o t
o r
p e r m it
t o
f o r
th e
A
19 6 1,
fo llo w e d
c om m odities
o f
and
exam ple
p r ic e
and
upw ard
b u t
no
th e
p r ic e
need
D OD
A .
Fe t c h k o ,
to
show s
a
m akes
o f
h an d le
a
sh arp
in p u t
d a t a ,
l a t e r
s t r i k i n g
show s
resum p
s i m i l a r i t y
d e s c rib e d
a b o ve ,
aware
la b o r
has
o f
th e
in p u ts
p re p are d
in a d e
to
e s tim a te
in d e xe s ,
w hich
I I I - C .
Fe t c h k o ,
P u r p o s e s ."
Co s t
agency
Na vy
p r i c i n g .
been
and
c y c le .
w ays
w ith
p r ic e
use
th e
in d e x
r e l a t i o n s h i p s ,
m a te ria l
Ap p e n d ix
J .
Th e
lo n g
to
e a rn in g s
d e c re a s e .
in d exes
Th a t
an
h o u r ly
d i r e c t
th e
and
Th is
m oney
m a te r ia ls
Sm ith
p o s s ib le
p e r
average
o b ta in
o f
p r o
in p u t
and
Main
19 5 8
has
o f
by
a f t e r
f o r
r e l a t i o n
p ro d u c tio n
u p sw in g ;
Co m m i s s i o n
s h i p b u i l d i n g .
and
an
average
sh arp
c o s t
p r e s e n te d .
m ovem ent
o u tp u t
o f
by
th e
and
p r o
m arg in al
la b o r
De p a rtm e n t
and
t h i s
th e
o f
lo n g
p ap e r
in d e x
is
c o s t
Ro s s i
th e
s h i p s .
i .e .,
w e ig h ts — to
h an d le
in d u s tr y
On c e
la b o r
De i
in
th e
d i v i d i n g
u n i t
p r ic e
Bu d get
th e
T h e ...
c a lc u la te d
i n t e r n a l l y
d ata
c lim b ,
f o r
l a b o r ,
sam ple
M a ritim e
p r ic e s
o f
o u tp u t
o u tp u t.
m easurem ent
in p u t
u s in g
t h a t
p r ic e
r a te
ste e p
U .S .
u n i t
th e
o f
B LS
a n o th e r
o f
used
to
th e
a i r c r a f t
p ro vid e s
A
on
d id
p r ic e
19 5 8
in
th en
tonn age
problem s
fro m
a
o f
D OD
d e c lin e
p e r
com bined— w ith
m easure
th e
produ c e
p r o d u c t ."
l i m i t a t i o n s
o f
" r e la te s
d e te rm in e d .
was
m arg in al
m easures
d e sc rib e s
som e
e a s i l y
w ere
An o th e r
to
o u tp u t
o u t p u t ,
Data
p h ys ic a l
d i r e c t
needed
q u a n t i fi e d ,
was
fu n c tio n
" In flu e n c e s
Na va l
Re s e a r c h
Sh ip
on
Na va l
Sys te m s
Sym p o s iu m ,
March
Sh ip
Co m m a n d ,
19 70 .
Co s t
p ap e r
Es t i
p r e
234
No n e
r i g h t
o f
th e se
in d exes
d i r e c t i o n .
c r a f t ,
a
p r ic in g
In
t e n t a t i v e
and
a
r e p re s e n t
a d d i t i o n ,
sam ple
o f
as
m entioned
10 -12
fo llo w -th r o u g h
on
p e r fe c t i o n ,
typ e s
in
th e
m ig h t
changes
in
b u t
be
th e y
p o in t
d is c u s s io n
c h osen .
in
on
th e
a i r
D ir e c t
s p e c ific a tio n s
c o u ld
be
o th e r
p ro d u c ts
a tte m p te d .
Th e
w ith
need
lon g
Ge n e r a l,
to
p ro d u c tio n
Se c tio n
c o n tr a c to r s
in
p r ic e s
w ith
th e
D OD
f o r
as
In
be
any
b u t
d e live r e d
o r
in
t h a t
o rd e r
d e fla te d
w hich
th e
to
and
are
" Ra d io s ,
i f
a
D OD
c ourse
w i l l
e v e n ts ,
o b l i g a t i o n s )
and
Ch a p te r
be
the
in
I I I ,
c lo s e
p rob lem
m ay
p r ic e
o b lig a tio n
in d e x
s h o u ld
n o t
sh o u ld
A
r e fe r
h ave
been
a d ju s te d
a c h ie ve
n o t
Pr ic in g
touch
o f
be
to
was
d o lla r s
a c t u a l l y
as
in
w ith
m atc h ing
g r e a t
As
com m on.
own
in
r i g h t
th e
r e fe r
to
e xp e n d itu re s
p ric e s
p a rts
as
a l t e r n a t i v e ,
w hich
m ay
s h ip
in d e x
c on fo rm
w ith
c o u ld
th e
f o r
a l l
be
to
sh o u ld
be
c om p letion
o th e r
item s
r e d i s t r i b u t e d
in
to
o f
are
to
c om pleted
c o m p le te d ,
be
p r e fe r a b le
used
a g a in s t
d a te s .
th e
Th e n ,
i n d e x ,
th e
ye a rs
th e
in
s p e n t.
Co m m u n ic a tio n s
i t s
o r
com ponent
fi n i s h e d
c o n s is te n c y
c o n s ta n t
to
second
th e
in
sh ip s
in
y e a r 's
th a t
m oney
f o r
s tr e s s e d
a u d ito r s
o f
(o r
is
s h ip
been
p r ic in g
g ive n
i n s t a l l e d .
m i s s i l e s .
tio n s
norm al
in d e x
3 .
im p o rta n t
Because
o f
a g e n c ie s .
th e
th e
has
e xp e n d itu re s
e ve n t
c o n c e p tu a lly ,
va lu e s
th e
tim in g
c yc le s
D.
o th e r
d e fl a t e d ,
s h i p s ,
c o n s id e r
and
and
case
as
o f
El e c t r o n i c
com ponents,
a i r c r a f t
Ho w e ve r,
th e
Ar m y
Te le c o m m u n ic a tio n s
and
Oth e r
was
and
a b le
M ajo r
Eq u i p m e n t — C & E
equipm ent
e s p e c ia lly
a i r c r a f t
s h i p s ,
to
C& E
f o r
p ro d u c t
i s o l a t e
f i v e
Eq u i p m e n t "
m o d ific a
item s
(t o t a l i n g
o f
is
235
som e
$ 3 6 .5
m i l l i o n
equipm ent
item s
m ore
in
in
th e
o th e r
a
p ro b le m ,
th ro u g h
a
num ber
to
p ro d u c t
Fi s c a l
w i l l
Ye a r
h ave
W eapons
ite m s ,
s h i p s .
Th e
i t
a k in
c h o se n .
ADP
be
th e se
equipm ent
s e le c te d
w ou ld
fo l l o w
a
a c c e ss o rie s
sh o u ld
be
sta n d a rd
h o ld s
s i m i l a r l y
to
p e rc e n t
r a t i o
w id esp read
o r
p o s s ib le
and
to
75
w ith o u t
th o se
w ou ld
ab o u t
t h i s
i f
be
w ere
perhaps
Co m p o n e n ts
n e a r ly
o f
p r i c i n g .
Ar m y
p r ic in g
f o r
groups
and
Co n tro l
V e h ic le s — W h ile
can
o f
DOD,
be
a
p ro ve
m odel
am e
Th e s e
va lu e
th ro u g h o u t
i f
q u a l i t y
changes
Th e r e
th e se
th e
va r io u s
s p e c i fi c a ti o n s
are
be
an
t h a t
s h o u ld
a lr e a d y
p r o vid e
s e t
as
in
am ple
h o ld
th e
th re e
C& E
in
good
s t a r t
i n s t i t u t e d
(s e e
in d ic a tio n s
th a n
m any
a i r c r a f t
a p p lie d .
guns— sh o u ld
be
e s ta b lis h e d
to
o ve r
t h i s
d i f f i c u l t y
th an
be
o p p o r tu n ity
t h a t
com plex
s h o u ld
au to m o b ile
c o n s ta n t
m ore
le s s
fo r t h
ite m s — ta n k s ,
m easured
s h o u ld
Th e r e
item s
p r in c ip le s
f o r
tim e .
perhaps
m ore
and
s t a r t ,
c o u ld
y e a r s .
m ade
c a tio n s
in
o f
19 72 ;
a
w hich
V I I - 1 2 ) .
c i v i l i a n
to
b u t
c o n s titu te d
been
4 .
o r
As
s e r v i c e s ,
p roc ed u res
groups
Ex h i b i t
19 70 -72 ) ,
m o d i fi c a ti o n s .
o f
n ab le
FY
a
S p e c i f i
and
e xa m p le .
p r ic e
a m m u n itio n ,
r e l a t i v e l y
p ro d u c t
is
lo n g
a lr e a d y
a c c o rd in g
p e r io d
b e in g
o f
p r ic e d
DOD.
5 .
s i m i l a r i t y
c ars
and
ences
in
Ta c ti c a l
and
to
c i v i l i a n
t h e i r
b u s e s .
Th e
s p e c i fi c a t i o n
d iffe r e n c e
in
m a rk e t.
Su p p o rt
need
fro m
Th e
V e h i c l e s — Th e s e
c o u n te r p a r ts ,
f o r
th e
d i r e c t
W h olesale
such
p r ic in g
c i v i l i a n
ite m ,
Pr ic e
h ave
as
com es
a
t r u c k s ,
n o t
h o w e ve r,
In d e x
h ig h e r
p r ic e s
o n ly
b u t
degree
o f
p assen g er
fro m
fro m
d i f f e r
th e
au to m o b ile s
236
EX H I B I T
V I I -12
ARM Y
C OM M U N I C A TI ON
AND
EL EC T R O N I C
EQ U I P M EN T
Ca te g o ry
( FI S C A L
Va lu e
(m illio n s
Ra d io s ,
Te le c o m m u n ic a tio n s
o th e r
m ajo r
El e c t r o n i c
M a jo r
ADP
C& E
Co m p o n e n ts
C O M S EC
and
Sw itc h in g
$
Ac c e s s o rie s
Eq u i p m e n t
5 .0
2 4 .0
Eq u i p m e n t
6 .4
8. 2
An te n n a e
0 .4
M o d ific a tio n
Eq u i p m e n t
Po w e r
Su p p ly
Eq u i p m e n t
Ph o to g ra p h ic
Eq u i p m e n t
Fi r s t
Te c h n ic a l
D e s tin a tio n
3 .1
2 .0
0 .7
Se rvic e s
7 .7
Tr a n s p o r ta tio n
3 .1
To ta l
So u rc e :
8 3 .5
1 7 .1
Eq u i p m e n t
Co n tr a c to r
o f
and
Eq u i p m e n t
Eq u i p m e n t
Te s t
Y EA R
$
M i l i t a r y
Pr ic e
In d ic e s ,
FY
19 73 ,
Ar m y
Bu d g e t,
1 6 1 .2
o p .c i t .
D o lla r s )
19 72 )
237
as
s o ld
DOD.
to
d e a le r s .
Ag a in
th e
recom m ended.
As
in
c i v i l i a n
m e n ts.
A
th e se
d e vic e s
o f
a
D OD
g o a l .
c o n s is te n t
d i f f i c u l t
a
w i l l
as
w ith
t o
h a ve
a
f o r
much
a u to m o b ile s
be
tru c k s
i s
th e
le s s
in
s a le s
Ch a p te r
As
m ade
on
a
c om ponen ts
as
p a r t
p r ic in g
m is s ile s
h ere
to
I I I
o f
th e
o f
D OD
be
c ase
is
o f
t h a t
a d d itio n
m i s s i l e
th e
as
in p u t
p re se n te d
th e y
to
to
im p ro ve
was
do
t h a t
o f
n o t
in
con
th e
p r i c i n g .
m a jo r
a i r c r a f t
e l e c t r o n i c
p r a c t i c a l
as
q u a l i t y
tr e a tm e n t
th e
o f
m a jo r
is
a r is e s
q u e s tio n
inasm uch
o p p o s ite
p r o b a b ly
p o r t i o n
c o n s titu te s
in c r e a s e ,
th e
in
q u e s tio n
c on c e p tu al
c onc epts
w i l l
th e
d e vic e s
p r ic e
th e
p r i c e .
t o
o f
Th is
c o n s id e r a b le
e l e c t r o n i c
in c lu d e d ,
recom m endation
M i s s i l e s — Th i s
in c l u d e s
s io n
Th e
take n
W PI
m ost
d is c u s s io n
be
to
and
a n t i -p o l l u t i o n
I I I .
t r i b u t e
6 .
n o t
d e s c rib e d
a u to m o b ile s
d e ta i le d
Ch a p te r
b u t
are
,
a d d itio n
th e
s a le s
m ethodology
w h e th e r
in
Fl e e t
p r o d u c t
th e
c a te g o r y
m i s s i l e
p ro g ram
A
e q u ip m e n t.
b a s is
w h e th e r
p r i c e
o r
to
t o
d e c i
in c l u d e
th e
th e s e
s e p a
p r i c e
r a t e l y .
W h ile
th e le s s
to
p r ic e s
m a te ,
th e
som e
n o t
im p o r ta n t
o f
t h i s
w ou ld
p ro d u c ts
p r i c e s .
up
to
m ake
m a te r ia ls
S A FEG U A R D
show
o f
in
re p re s e n t
p ro g ram ,
m ay
an
and
be
f o r
a
m ay
s t a r t .
w ages
an
Ev e n
in p u ts
in s ta n c e ,
based
e s p e c ia lly
i f
o f
im provem ent
in flu e n c in g
in d e x
be
on
th e
i t
is
i t
w ere
o ve r
w h at
l i k e l y
has
t h a t
p r ic e
s o u r c e s ,
i t
n e c e ssary
c o n tr a c to r s
com m odity
se c on d ary
d i f f i c u l t ,
as
a
to
n e ve r
r e s o r t
crude
been
D OD
is
d o n e .
dem and
tr e n d s .
c i v i l i a n
e s t i
Th is
In
f o r
w ould
p ro d u c t
238
In
t o r s '
m any
i n p u t s .
l i k e l y
th e
t h a t
to o l
e xp e rie n c e
l i k e l y
Fo r
f o r
7 .
a
a
a b i l i t y
sam p lin g
sam ple
I n s t i t u t i o n
c o u ld
o f
be
p r o d u c ts .
c o u ld
be
(RAC)
im pac t
800
Pr o g r a m
o f
o f
s tu d y
to
o r
im p o rta n t
"e xe m p lar"
item s
b u t
to
p r i c i n g ,
s t a r t
t h e i r
and
a
g e t
th e
f o r
and
w ith
im p o rta n c e )
Fo r
few
item s
used
w ou ld
be
ite m
m igh t
th e
fi n a l
th e
Fi v e - Y e a r
and
l i k e l y
assuranc e
o f
t h a t
th e
are
a
in
a
m o d ifie d
k in d
m any
th e
sam p lin g
D OD
p la n s ,
i t
to
p ro b
typ e s
o f
Co rp o ra tio n
and
13
w ith
Fi n a n c i a l
groups
w ith
Fi n a l l y ,
Ex h i b i t
w ou ld
item s
V I I -13
be
a llo w
f o r
s e le c te d
p r ic in g
(b e c a u s e
o f
fra m e .
cay
—
"M e th od olog y
Su m m a r y
f o r
R e s u l t s ."
In d u s tr y
Im p ac t
o ^ c v t .,
page
A n a l y s i s ,
9 .
Vo lu m e
I
o f
h ow ever,
s ta r te d
g ro u p .
w ou ld
is
c o n s id e r a tio n
w ay
l i s t
in
ju d g m e n t.
va rio u s
i n t o
in
as
m ath em atic al
s tu d y
each
j u s t
a p p ro a c h .
An a ly s is
th ese
is
e s s e n tia l
Str u c tu r e
s i m i l a r
f i n a l
be
u n der
show n
o f
one
sam plin g
Th is
Fo r c e
item s
be
am ong
i t
Ad a p ta tio n
seasoned
Re s e a r c h
com bined
t h a t
s e le c tio n
in
and
c o n tr a c
ite m )
In d e x.
n ee d ed .
by
o f
them selves
w i l l
p r o j e c t
in
hom ogeneous
be
i t
m o d i fi c a t i o n .
An n e x
is
q u ic k
som e
w i l l
sp read
p r ic in g
Pr ic e
e i t h e r
f o r
p r ic e s
s i g n i f i c a n t
m is s ile s
e xp e rie n c e
w a it
use
s p e c i fi c a t i o n s ,
th e
ite m s ,
c h o s e n . ILL/ T h e s e
I t
a
n o t
to
W h olesale
p r o to ty p e
s u ita b le
w ere
f o r
B LS
fro m
p roc ed u re
r e l a t i v e l y
o n l y .
o r
f o r
M a te r ia l
i l l u s t r a t i o n
th e
fro m
e xp e rim e n ta tio n
need
eq u ipm en t
( FY FS FP )
o f
(a
P r o d u c t s — Ev e n t u a l l y
p r ic in g
a
n e c e ssary
to o l i n g
h o w e ve r.
p roc ed u re
to
as
r e p r e s e n ta tiv e
o r d e r
g ive n
item s
th e
be
d e velop ed
s t a n d a r d i ze d
conm enced
In
be
u s e d ,
Ch o o sin g
d e ve lo p
b u t
c o u ld
be
n o t
p ro d u c ts
c o n s id e ra b le
p r i c i n g
w i l l
c a te g o rie s
s h o u ld
t h a t
i t
such
in d exes
m achine
b id
in s ta n c e s
M eth od oloq y
and
239
EXHI BI T VI I - 13— I MPACT STUDY PROCUREMENT GROUPS AND EXEMPLARS
Exempl ar s
Gr oups
Hel i copt er s
UHI B/ D I r oquoi s
Fi ght er Ai r c r af t
F/ RH- 4B/ C Phant om
Tr anspor t
C- 141A St ar l i f t er
and Ut i l i t y Ai r c r af t
Mi ssi l es
Pol ar i s A- 3
Sur f ace Shi ps
Dest r oyer Escor t
Submar i nes
SSN
Combat Vehi cl es
M60A1 Tanks
Spec i al i zed Suppor t Vehi cl es
GOER Vehi cl es ( 8- t on)
Tor pedoes,
MK 46 Tor pedo
Mi nes,
and Bombs
Lar ge- cal i ber Ammuni t i on
105- mm M456 Car t r i dge
Smal l - cal i ber Ammuni t i on
7. 62- mm Car t r i dge
El ect r oni c s and Communi cat i ons
412- L component s
Sour ce:
" Met hodol ogy f or I ndust r y I mpact Anal ysi s,
and Summar y Resul t s. " op. c i t . , page 9.
Vol ume I Met hodol ogy
240
8-
Comment s on Pos s i bi l i t i es— Pr oc ur ement
among t he most di f f i c ul t as wel l
of DOD.
Some of t he i t ems,
st r ai ght - f or war d manner .
as t he most
or dnance,
t he met hodol ogy wi l l
ci vi l i an i t ems,
change wi l l
or der s.
at
Pr i ce t r ends can be devel oped by f ol l owi ng t he
Ot her
i t ems ar e of moder at e
t r ucks and ot her vehi cl es of var i ous ki nds.
be r el at ed t o t hat
such as machi ner y,
Her e,
used f or t he mor e compl ex
aut omobi l es
The f i el d audi t or s shoul d be br ought
not onl y
f or t hei r i nsi ght
and t r ucks.
Qual i t y
i nt o t he pr i ci ng pr ocess
i nt o t echni cal
but f or hel p i n as sessi ng t he val ue change.
it
can be handl ed i n a
need t o be wat c hed car ef ul l y by f ol l owi ng t he maj or change
t hi s st age,
t hat
no doubt be
chal l engi ng pr i ci ng pr obl ems
such as ammuni t i on,
hi st or y of a car ef ul l y speci f i ed pr oduct .
di f f i c ul t y
pr i ci ng wi l l
aspect s
I t shoul d be r emember ed
i s i mpor t ant t o separ at e t he cost of a change or der i nt o t wo
par t s — t hat par t whi c h can be assi gned t o qual i t y or speci f i cat i on
change and t hat whi ch r epr esent s pr i ce change.
i t ems l i ke ai r cr af t
and shi ps,
For even mor e compl ex
t he above met hod shoul d be suppl ement ed
wi t h at t empt s t o appl y r egr essi on anal ysi s ( hedoni c measur es)
t o expr ess
a pr i ce as a f unct i on of a basi c pr i ce and " pr i ces" of var i ous assi gned
qual i t y at t r i but es.
I n addi t i on,
pr ot ot ype pr i c i ng— pr i ci ng or bi ddi ng
on a st andar di zed desi gn or bl uepr i nt — shoul d be t r i ed.
whi c h coul d pr ove t he mos t di f f i c ul t of
For mi ssi l es,
t he pr oc ur ement i t ems,
i t may be
necess ar y t o br eak t he j ob i nt o component s.
For t unat el y,
cur ement
ov er t he year s ef f or t s have been made t o pr i ce pr o
i t ems wi t h out put
j oi nt Def ense- BLS ef f or t
pr i ces,
dr awn f r om t he exper i ence of DOD.
r esul t ed i n pr i ce i ndexes f or many pr oduct s
A
241
dur i ng Wor l d War I I , and ai r cr af t and shi ps have been subj ect t o speci al
measur ement pr ogr ams i n r ecent year s.
As i ndi cat ed above, unt i l
i ng shoul d pr oceed wi t h, f i r st ,
r esear ch devel ops a pr obabi l i t y sampl e, pr i c
t est pr i ci ng and t hen act ual
per manent pr i c
i ng f or per haps 10- 12 i t ems each f or shi ps, el ect r oni cs and ai r cr af t , choos
i ng t hose i t ems whi ch have been i n pr oduct i on f or a consi der abl e t i me.
H.
Resear ch,
Devel opment , Test and Eval uat i on
The RDT and E pr ogr ams " f und t he devel opment , t est , and eval uat i on of
new and i mpr oved weapon syst ems and r el at ed equi pment car r i ed out by t he
Ar my, Navy, Ai r For ce and Def ense Agenci es.
They al so pr ovi de f or sci en
t i f i c r esear ch suppor t i ng def ense f unct i ons and oper at i ons.
f or med by Gover nment l abor at or i es, uni ver si t i es,
and nonpr of i t or gani zat i ons.
i ndust r i al
Wor k i s per
cont r act or s,
Resear ch and devel opment pr ogr ams ar e as a
r ul e f unded so t hat each year ' s r esour ces suppor t one year ' s i ncr ement of
t he t ot al
pr ogr am c o s t . " ^ RDT and E obl i gat i ons amount ed t o al most 10 per
cent of t he DOD t ot al
Per sonnel
di r ect obl i gat i ons i n FY 1972, excl udi ng r evol vi ng f unds.
compensat i on const i t ut ed 7. 8 per cent , and " ot her ser vi ces,
85. 4 per cent of t ot al
di r ect obl i gat i ons of RTD and E i n FY 1972.
ser vi ces" const i t ut ed 93. 1 per cent of nonper sonnel
Equi pment account ed f or onl y 2 per cent .
" Ot her
compensat i on obl i gat i ons.
An adequat e pr i ci ng cover age f or
" ot her ser vi ces" woul d t hus seem t o meet t he needs f or a pr i ce i ndex,
especi al l y wi t h t he addi t i on of t he per sonnel
nat ur e of t he equi pment ,
i ndex.
Because of t he speci al
however , and because t he pr of essi onal
nel may have some uni que char act er i st i cs,
t he di scussi on wi l l
t hese t hr ee cat egor i es.
52/ Budget of t he U. S. Gover nment , Fi scal
Year 1974.
R&D per son
deal
wi t h
242
I n t he 1960' s,
at
t he Of f i ce of Economi c and Manpower St udi es of
t he behest of
t i onal
t he Bur eau of Labor St at i s t i cs under t ook a st udy
t he Na
Sci ence Foundat i on — '^' t o det er mi ne whet her dat a coul d be c ol
l ect ed and a met hodol ogy devi sed t o compi l e i ndexes of pr i ce change i n
i nput s t o r esear ch and devel opment . "
t he convent i onal
pr i c e- i ndex pr oc edur es’ coul d be appl i ed and t o i dent i f y
pr obl ems of sampl i ng,
exper i ment al
The ai m was t o ascer t ai n how wel l
pr i ci ng,
wei ght s,
and qual i t y change.
A set of
i ndexes wer e const r uct ed and r ecommendat i ons made.
conc l usi on was dr awn t hat gi ven r esour ces and t i me,
const r uc t a r el i abl e i ndex of
The
i t i s f easi bl e t o
r esear ch and devel opment
i nput pr i ces,
so
f ar as t he Ar my por t i on of DOD i s concer ned ( and i ncl udi ng pr i vat e c on
t r act or s 1 1abor at or i es ).
The pr esent
st udy pr ovi des an oppor t uni t y t o r eassess some of t he
conc l usi ons r eached i n t he BLS- NSF st udy,
as wel l
as t o st udy t he RDT
and E appr opr i at i on i n a manner compar abl e t o t he ot her DOD cat egor i es.
1•
Per sonnel
Compensat i on
The r eader wi l l
r ecal l
( i ncl udi ng ci vi l i an as wel l ) ,
t hat Sect i on E on Mi l i t ar y Per sonnel
cont ai ned a suggest i on t hat t he j ob de
sc r i pt i on cont i nue t o be t he basi c pr i ci ng uni t f or ci vi l i an per sonnel .
^ T h e ser i es of r epor t s f r om t he Bur eau of Labor St at i st i cs t o t he Na
t i onal Sci ence Foundat i on wer e consol i dat ed and publ i shed af t er t he
pr oj ect s t er mi nat i on i n Sear l e, Al l an D. , and Fr anci s S. Cunni ngham,
YpaSr Î Qf i i ^ l
Sj 1? I ndexes f or Resear ch and Devel opment , Fi scal
Year s 1961- 65,
NSF 70- 7, a r epor t by t he Bur eau of Labor St at i s t i cs t o
t he Nat i onal Sci ence Foundat i on, November 1968.
243
Ther e was r ecogni t i on of
A f ur
t he poss i bi l i t y of upwar d " j ob cr eep. "
t her r ecommendat i on was made t hat a per i odi c st udy be made t o see whet h
er j obs had been r edef i ned so t hat t oday' s GS- 13 mi ght not be s ubs t an
t i al l y yest er day' s GS- 12 or 11,
f or exampl e.
An al t er nat i v e was di s
c us s ed— t hat pr i ci ng on t he basi s of t r ai ni ng and exper i ence
speci f i cat i on be adopt ed.
concept ual
Thi s was abandoned on pr act i cal
and,
i n par t ,
gr ounds.
The BLS- NSF pr oj ec t al so consi der ed t hese t opi cs wi t h t he same
gener al
concl usi on.
However ,
r esear ch and devel opment appear s t o be
al most r eady- made f or t est i ng whet her t he t r ai ni ng- and- exper i ence r out e
woul d r esul t i n subs t ant i al l y di f f er ent
i ndexes and,
anal ys i s of r easons.
f i el d woul d l end i t sel f ad-
The R&D per sonnel
mi r abl y t o t est i ng t hi s new t ype of per sonnel
( 1)
i f so,
meas ur e, — because:
Per haps mor e t han i n any ot her DOD ar ea,
t he i nt er est and
needs of empl oyer s and pr ospect i v e empl oyees i s i n f or mal
t r ai ni ng and ex per i ence i n t he f i el d of
pr ovi de an
speci al t y.
academi c
For t hi s r eason some
advi ser s " ur ged t o i gnor e j ob des c r i pt i ons . . . al t oget her ,
and t o set up
a meas ur e i n whi c h t he sal ar y necess ar y t o ent i ce a PhD wi t h' n'
exper i ence woul d be compar ed y ear t o year wi t hout
appr oach pr oved i mpr act i cal
ment f or a speci f i ed j ob.
year s
r egar d t o gr ade.
and not ent i r el y wi t hi n t he concept of
Al so,
Thi s
pay
di scussi ons wi t h NSF and t he l abor a-
- ^ For di scussi on of concept s and appl i cat i on of t hi s met hod i n t he pr i
vat e economy, see t he f or t hcomi ng b o o k ,Deni son, Edwar d F. ,
Account i ng
f or Uni t ed St at es Economi c Gr owt h, 1929 t o 1969, " Br ooki ngs I nst i t ut i on.
Deni son deal s wi t h f or mal educat i on, age, and sex i n hi s anal ysi s and
st at i st i cs.
244
t o n e s per suaded us t hat not hi ng woul d be gai ned by separ at e measur es
by f i el d- c hemi s t r y ,
er al
physi cs,
et c. " ^ 1
wi t hout depar t i ng f r om t he gen
use of t he j ob s heet — modi f i ed f or
" up- cr eep" — i n t he l i ght of
l at er devel opment s i t woul d seem t hat t her e woul d be i nt er est
i n seei ng
whet her an i ndex based on ex per i ence and t r ai ni ng woul d move i n a si mi l ar
manner .
Al so,
i t may be t hat t her e woul d be i nt er est
i n t he i ndexes
or gani zed by f i el d of i nt er est — bot h i n DOD and i n t he academi c wor l d.
( 2)
The pr oj ect
vi ewed i n t he 1960' s.
shoul d no l onger be as i mpr act i cal
Si nce t hat
t i on on t he par t of t he U. S.
desi r abi l i t y of Feder al
t i me,
Ci vi l
as i t was
t her e has been an i nt ens i f i c a
Ser v i c e Commi s si on t o st r ess t he
car eer devel opment .
I n t he cour se of
t hi s dr i ve
a consi der abl e vol ume of dat a wer e col l ect ed f r om t he pr of essi onal
f or ce of
t he Feder al
pr esent gr ade.
mat er i al ,
of
Gover nment ,
cover i ng educat i on,
I t was mai nt ai ned annual l y.
al r eady machi ne pr ocessed,
t hi s st udy,
wor k
exper i ence and
The DOD- R&D por t i on of
t hi s
coul d be made av ai l abl e f or pur poses
i f i ndeed t he DOD per sonnel
of f i ces t hemsel ves cannot
r eadi l y f ur ni sh i t .
The exper i ment al
desi gnat i ons.
Per haps,
i ndex woul d be l i mi t ed t o pr of essi onal ,
i t mi ght be necess ar y t o r est r i ct
cai Cul at i ons t o t he ent r ance gr ades at al l
at al l
sci ent i f i c
t he i ni t i al
l ev el s - - i , e. , new empl oyees
gr ades — r at her t han i ncl udi ng j obs f i l l ed by pr omot i on.
— ' Exper i ment al
Year s 1961- 65,
I nput Pr i ce I ndexes f or Resear ch and Devel opment ,
oj d. c v t .
Fi scal
245
Thi s t est
i ndex woul d ei t her hel p al l evi at e t he t r epi dat i on t hat
t he gr ade- based ser i es i s bi ased downwar d or appl y a spur f or cor r ec t i on
of t he dat a ( i f not
2.
t he si t uat i on) .
" Ot her Ser vi ces' 1 and Suppl i es and Mat er i al s
So f ar as t he budget appr opr i at i on i s concer ned,
a gr eat deal
mor e t o be not ed t hat
t her e i s not
has not al r eady been di scus sed under
t he same obl i gat i on cl ass under Oper at i on and Mai nt enance.
The NSF- BLS
st udy di d not br eak t he Ar my l abor at or y expendi t ur es down i nt o t he obl i
gat i on cat egor i es of t he DOD budget ,
of t hat exper i ment al
i n t he mat er i al
equi pment .
pr oj ect
but i t
i s wor t h not i ng t he success
i n obt ai ni ng pr i ces f or a gr eat many i t ems
and suppl y cat egor y,
as wel l
as some i t ems of heavy
Success was not ed i n obt ai ni ng pr i ce ser i es f or some 289
pr oduct s under t hat st udy' s headi ng Mat er i al s, Suppl i es, and Equi pment .
Det ai l ed spec i f i c at i ons ar e gi ven f or many of t hese i n t hat r epor t wi t h
t hei r Feder al
Suppl y Cl as si f i cat i on codes.
Becaus e of t he di f f er ent sy st em of cl assi f i cat i on i n t he BLS- NSF
st udy i t
i s di f f i c ul t t o i dent i f y t he " ot her ser vi ces. "
I t may be pr e
sumed t hat a number of t hese appear under t hat r epor t ' s gr oupi ng,
head and Suppor t Cost s. "
f or pai nt i ng,
I n t hat ar ea wer e 12 ser i es f or ut i l i t i es,
t hr ee f or mi sc el l aneous suppl i es,
pl i es and equi pment ,
" Over
t hr ee f or r ent ,
one
and 11 f or of f i ce s up
f our f or t axes and i nsur ance.
Ex
hi bi t V11- 14 shows a l i st of t he cat egor i es pr i ced under t he headi ng,
" Mat er i al s,
3.
Suppl i es and Equi pment . "
Equi pment
- Nonhomooeneous Pr oduct s
As i ndi cat ed i n Chapt er I I I ,
Pr i ci ng i n Gener al ,
t he pr i nci pal
246
EXHI BI T VI 1- 14
MATERI ALS,
Exampl es of
SUPPLI ES AND EQUI PMENT
Pr oduct s I ncl uded i n BLS- NSF and I nddx
El ect r oni c Component s
Aut omot i ve equi pment
Machi ner y
Or dnance and Ac cessor i es
El ect r oni c Syst ems
Ai r c r af t and Mi ssi l e Par t s
El ect r oni c Test
Equi pment
Chemi cal s
El ect r i cal
Equi pment
Sci ent i f i c I nst r ument s
Pr i mar y and Fabr i cat ed Met al s
Lumber ,
Feed,
~
I ncl udes cat s,
Sour ce:
Budget of
r abbi t s,
t he U. S.
f ur ni t ur e,
Li vest ock,
et c.
et c. - ^
and monkeys.
Gover nment ,
Fi scal
Year 1974.
247
f r ust r at i ons i n devel opi ng pr i ce i ndexes ar i se f r om changes i n s pec i f i
cat i on and qual i t y change among t he het er ogeneous pr oduct s.
or di nar i l y i t ems of heavy,
The exper i ment al
per i ence,
These ar e
compl ex equi pment .
pr oj ec t deal t wi t h t hi s quest i on f r om act ual
and some of t he f i ndi ngs and r ecommendat i ons ar e of
ex
i nt er est
not onl y i n t hi s RDT and E sect i on but ,
equal l y,
Pr ocur ement .
" For t he 1961- 63 segment of t he
st udy,
The r epor t acknowl edged:
i n t he sect i on on
consi der abl e ef f or t s t o obt ai n adequat e pr i ce dat a on t hese
uni que devi ces met wi t h l i mi t ed success.
change i nvol ved pr obabl y
l em at t hi s ear l y st age of
The degr ee of
speci f i cat i on
pr event ed any adequat e sol ut i on of t he pr ob
i ndex const r uct i on.
" A bet t er way t o det er mi ne pr i ce movement f or devel opment al
r i al
woul d be t o conduct ex pendi t ur es and pr i ci ng sur veys of
t r act or s as wel l
as of
t he pr i me cont r act or s. "
subc on
Dupl i c at i on woul d be
avoi ded i n t he wei ght and pr i ci ng st r uct ur e of t he t ot al
The r epor t concedes al so:
mat e
i ndex.
" The subc ont r ac t or sur veys may st i l l
l eave much t o be desi r ed i f changes i n t he subc ont r act or ' s pr oduc t i vi t y
ar e not t aken i nt o ac c ount ___ St i l l
omi t t i ng i mpor t ant
i t ems.
" A suggest i on,
anal ysi s of pr i ce,
t hi s appr oach woul d be bet t er t han
whi c h came f r om a subcont r act or , was f or a cost
i nput s of
l abor ,
mat er i al ,
over head,
et c. ,
char ged t o
each pr oduct under t he cont r act . ' 1^
Ex p e r i me n t a l
Year s 1961- 65,
I nput Pr i ce I ndexes f or Resear ch and Devel opment ,
oj ). c i t .
Fi scal
248
The r epor t concl udes t hat i t woul d be bet t er t o t r ace speci f i cat i on
changes of
i t ems pur chased and ac cor d t hem a val ue i n or der t o adj ust
f or qual i t y change.
Thi s shoul d be car r i ed out i n a manner descr i bed
pr evi ous l y and i l l ust r at ed i n t he case of WPI
R&D t her e ar e i t ems
aut omobi l es.
whi ch ar e pr oduced onl y once,
However ,
in
and f or t hese t her e
may be no ot her way t han t o use pr i ce movement s of component s.
I n any event t he pr oj ect demons t r at ed t hat
despi t e al l
i t s pr obl ems mus t be t he met hod empl oyed. "
pr oxy i ndexes f r om t he WPI
f or R&D)
" di r ect measur ement ,
vs^. di r ect l y pr i ced ser i es showed ( at l east
t he f ut i l i t y of r el i ance on dat a col l ect ed t o r epr esent
ci vi l i an- mar ket pr i ce t r ends.
Test
cl uded abov e i n Sect i on B on Di r ect
i ndexes i l l ust r at i ng t hi s wer e i n
Pr i ci ng.
Despi t e pr obl ems wi t h t he uni que i t ems,
t her e was some success
i n pr i ci ng i t ems,
whi ch,
as osc i l l os copes,
mi ssi l e chec kout and f i r i ng syst em,
scopes,
The t est of
di gi t al
whi l e not uni que, wer e of some compl exi t y,
mul t i pl i er s and accel er omet er s.
such
cannon, mi c r o
Some exampl es of spec i
f i cat i ons ar e shown i n Appendi x VI I - C.
4.
Sour ces of
I nf or mat i on
The Ar my R&D st udy f ound a good possi bi l i t y t hat wei ght and
pr i ce dat a coul d be obt ai ned f r om t he DOD Audi t Agenc y — f r om f i el d
agent s or r esi dent audi t or s i n i ndust r i al
wi t h DOD.
I n f act ,
i n t he opi ni ons of
pl ant s conduct i ng busi ness
some r esi dent audi t or s,
i ng woul d not add subs t ant i al l y t o wor kl oad,
avai l abl e f r om exi st i ng r ecor ds,
e. g. :
r epor t
si nce some i nf or mat i on i s
249
•
Tot al
cont r act
cost s br oken down by l abor ,
•
Over head subdi vi ded by r ent ,
•
Pr i ces of maj or pr oc ur ement
•
Pr i ces of some over head i t ems.
•
Cont r act
t axes,
i t ems,
mat er i al s,
over head.
et c.
such as subassembl i es.
val ues of subcont r act or s.
The audi t or s woul d have t o obt ai n f r om cont r act or s dat a on per s on
nel
ex pendi t ur es f or cl asses of mat er i al s and pr i ces of mat er i al s ot her
Ul t i mat el y,
t han maj or pr ocur ement .
essent i al
dat a mi ght
be obt ai ned
r out i nel y.
Gr ant ed t hat t hi s aspect of R&D pr i ci ng i s t he most di f f i cul t ,
seems t hat a begi nni ng mi ght
sampl e i s r ecommended,
be cost l y,
I t shoul d be r emember ed t hat a
be made.
not a compl et e sur vey of cont r act s,
whi c h woul d
bur densome and unnecessar y.
The BLS- NSF r epor t concl uded,
di r ect
it
on a not e of caut i ous opt i mi sm,
t hat
pr i ci ng i s f easi bl e.
5.
Rel at ed Measur es
Ther e have been ot her at t empt s t o meas ur e changes i n t he
ev er changi ng R&D act i vi t i es of DOD.
sci ent i st - mont h or year .
Thes e r ef l ect t he r i si ng cost per
One i ndex meas ur es t he basi c r esear ch cost of
t he Ai r For ce per uni t of sci ent i st - i nput ;
t he ot her ,
t he R&D cost of
t he Ar my per sci ent i s t - year . — ^ The l at t er was cons t r uct ed by di vi di ng
t he t ot al
annual
cost of
par t i ci pat i ng R&D or gani zat i ons by t he number
■^ 4ee:
Mi l t on, Hel en S. , Cost of Resear ch I ndex , 1920- 1970, RAC- TC- 430,
Resear ch Anal ys i s Cor por at i on ( now Gener al Resear ch Cor por at i on) , Jul y
1971; Br unner , E. D. , The Cost of Basi c Resear ch Ef f or t :
Ai r For ce Ex
per i enc e, 1954- 1964, RM- 4250- PR, The Rand Cor por at i on, Febr uar y 1965.
250
of sci ent i f i c per sonnel
of var i abl es,
i ndexes,
wor k i ng t her e.
i ncl udi ng pr i ce change,
of ei t her
i nput s or out put s.
change i n val ue of a f i xed,
These i ndexes meas ur e a number
but t hey do not pr esume t o be pr i ce
Ther e i s no at t empt
spec i f i ed uni t of quant i t y.
t o measur e
I nst ead,
t he
ser i es meas ur e t he combi ned ef f ect of changes i n pr oduct mi x of pur chases,
changes i n sci ent i st - mi x,
cr ease i f pr i ces i ncr ease;
and changes i n pr i ces.
or
i f equi pment becomes mor e ef f i ci ent and cost l y;
or i f mor e sophi st i cat ed equi pment
pl ex;
These i ndexes can i n
as R&D becomes mor e com58/
or i f sci ent i st s and t echni ci ans become mor e ef f i ci ent .
I ndexes of
i s pur chased,
t hi s ki nd woul d be mor e usef ul
a r el i abl e R&D pr i ce measur e,
t i st woul d l ar gel y r ef l ect
i f t hey wer e def l at ed by
so t hat cons t ant - dol l ar s spent per sc i en
t he i ncr easi ng sophi st i cat i on of t he t ool s
necess ar y f or r esear ch st af f s t o per f or m. — ''
compar i s on of t he i ndexes pr epar ed by Hel en
t he BLS- NSF st udy i s shown i n Sear l e, Al l an D. ,
i n Resear ch and Devel opment Pur chases, " Pr oceedi
Ecmomi c St at i st i cs Sect i on, Amer i c an St at i st i cal
^" hi s
cat i on
Sc i ent i
gr owt h
S. Mi l t on wi t h t hose of
" Measur i ng Pr i ce Change
ngs of t he Busi ness and
As soci at i on, 1956.
st ep has been t aken by A. V. Cohen and L. N. I vi ns i n The Sophi s t i
Fact or i n Sci ence Ex pendi t ur e. Uni t ed Ki ngdom' s Counci l f or
f i c Pol i cy, London 1967.
Af t er r emoval of i nf l at i onar y ef f ect s,
r at es i n sal ar i es and wages ar e pr es ent ed i n cons t ant val ue t er ms.
251
I .
Mi l i t ar y Cons t r uc t i on
A var i et y of pr ogr ams ar e i ncl uded i n t hi s appr opr i at i on:
" 1.
Maj or cons t r uc t i on- - t hi s cat egor y pr ovi des f or t he
acqui si t i on of
l and and f or cons t r uct i on of mi l i t ar y pr oj ect s.
. .
such const r uc t i on gener al l y exceeds $50, 000 per pr oj ect .
" St r at egi c f or ces- - pr ovi si on.
t i es and pr ovi de f or per sonnel
" Gener al
gener al
. . t o upgr ade exi st i ng f ac i l i
suppor t
f or st r at egi c war f ar e syst ems.
pur pose f or c es — pr oj ect s i n t hi s cat egor y suppor t
combat f or ces,
i ncl udi ng t hei r command or gani zat i ons,
l ogi st i cs or gani zat i ons or gani c t o t hese f or ces,
suppor t
uni t s,
as cons t i t uent
i ncl udi ng
medi cal ,
t he
and t he r el at ed
whi ch ar e depl oy ed or depl oyabl e
par t s of mi l i t ar y f or ces and f i el d or gani zat i ons.
" Speci al i zed ac t i v i t i es — f unds ar e pr ovi ded f or t he cont i nued
suppor t of t he j oi nt def ense ef f or t of t he Nor t h At l ant i c Tr eat y
Or gani zat i on.
Fundi ng f or abat ement of ai r and wat er pol l ut i on
at def ense i nst al l at i ons i s cont i nued t o assur e t hat act i ons t o
cor r ec t
vi ol at i ons of
Feder al ,
St at e,
and l ocal
st andar ds have been t aken or ar e under way.
i ni t i at i on of r adi ol ogi cal
ai r and wat er qual i t y
Funds ar e i ncl uded f or
cl ean- up at Eni wet ok At ol l .
" Resear ch and devel opment - - t he pr ogr am i ncl udes f aci l i t i es
r equi r ed i n suppor t of pr ogr ams t o advance knowl edge and t echnol ogy
i n such ar eas as weapons syst ems,
medi ci ne.
communi cat i ons,
el ect r oni cs,
and
. .
" Logi s t i c s - f undi ng f or t he moder ni z at i on and r epl acement of
ai r cr af t ,
shi ps,
and gr ound equi pment mai nt enance,
over haul
and
252’
r epai r f aci l i t i es.
t echnol ogi cal
. . t o meet
new r equi r ement s r esul t i ng f r om
advances.
" Per sonnel
s uppor t — f unds f or i mpr oved housi ng,
communi t y suppor t
f or l ower gr ade enl i st ed per sonnel
medi cal ,
and
and j uni or
gr ade of f i cer s t o encour age t hei r r et ent i on i n t he ser vi ce and
t he devel opment of an al l - vol unt eer f or ce.
" 2.
Mi nor cons t r uc t i on- - of per manent and t empor ar y pr oj ect s.
not t o exceed $300, 000 per pr oj ect f or ac t i ve f or ces and $50, 000
60/
per pr oj ect f or t he Reser ve Component Pr oj ect s. "
Mi l i t ar y const r uc t i on account s f or l ess t han 2 per cent of t he
t ot al
D0D di r ect obl i gat i ons i n FY 1972,
ex cl udi ng r evol vi ng f unds.
Land and st r uct ur es account s f or about 76. 5 per cent of
t ot al
D0D
di r ect obl i gat i ons f or t hi s appr opr i at i on and " ot her ser vi ces"
f or an addi t i onal
1.
10. 5 per cent .
Pr i ci ng Const r uc t i on Out put s
Of al l
t he br oad cat egor i es of pr oduct s and ser vi ces pur
chased by t he Depar t ment of Def ense,
const r uc t i on i s one f or whi ch
ver y l i t t l e genui ne pr i ci ng of t he f i ni shed pr oduct
i t sel f
has been
done i n or out of D0D.
Ther e ar e a var i et y^ of pr i ce i ndexes f or t he
const r uc t i on i ndust r y,
but al most al l
combi nat i ons of
i nput s i nt o cons t r uc t i on— wages or ear ni ngs and
var i ous mat er i al s pr i ces.
f or pr oduc t i vi t y change.
60/
ar e cons t r uct ed f r om wei ght ed
Budget of t he U. S.
Of t en t hese ar e wi t hout an adj ust ment
The pr i ci ng of
Gov er nment , Fi scal
i nput s t o const r uct i on
Year 1974.
.
253
woul d not be conc ept ual l y sat i sf ac t or y f or pr oj ect s bui l t under
cont r act
t o DOD.
I n t hese cases DOD' s i nput pr i ce r ef er s t o t he
compl et ed pr oj ect ,
not t o t he component s.
On t he ot her hand,
pr i ci ng
i nput s t o cons t r uc t i on woul d be sat i sf ac t or y t o meas ur e i nput
Even her e,
f or pr oj ect s under t aken by DOD.
woul d not be sat i sf ac t or y f or t he t ype of
" c os t - pr i ce i ndex"
i n Chapt er
however ,
i nput
pr i ce
pr i ci ng
pr i ce i ndex ( denot ed as
I I , Concept s and For mul at i ons) i n
whi c h t he " mar k et bas k et 1 of pur chases i s r el axed t o al l ow subs t i
t ut i on among mat er i al s or l abor .
2.
Some Av ai l abl e I ndexes
The Bur eau of t he Census publ i shes a pr i ce i ndex f or one-
f ami l y r esi dences,
whi c h moves t he t echni que of pr i ce meas ur ement
f or const r uc t i on i n t he di r ect i on i t shoul d go— t owar d t he pr i ci ng
of end- pr oduct s.
I t wi l l
be r ecal l ed t hat
i n Chapt er
II,
sever al
var i et i es of i ndex wer e descr i bed i n connec t i on wi t h DOD,
t hem:
( a)
i nput pr i ci ng;
pr oduc t i vi t y change,
( b)
among
i nput pr i ci ng wi t h an adj ust ment
f or
and ( c) out put pr i ci ng.
The Census " Pr i ce I ndex of New One- Fami l y Houses" comes cl os es t
t o t he l ast t ype of measur e,
i ndust r y;
i nput
a l evel
i ndex,
( i . e. ,
of act i vi t y,
f or t he cons t r uc t i on
whi c h r esul t s onl y i n a sat i sf ac t or y
t o DOD. ) As descr i bed above,
r egr essi on met hod t o deal
t he i ndex ut i l i zes a
wi t h qual i t y- change- or changi ng s pec i
f i cat i on f or ei ght char act er i st i cs:
of bat hr ooms,
out put
si ze,
number of st or i es,
pr esence or absence of ai r - condi t i oni ng,
par ki ng f aci l i t y,
t ype of f oundat i on,
number
t ype of
geogr aphi c l ocat i on
254
and met r opol i t an l ocat i on.
The f act t hat a wi de var i et y of mar ket -
choi ces i s av ai l abl e- - wi t h dat a— made t he use of t he hedoni c met hod
possi bl e.
As i ndi cat ed ear l i er t hi s met hod r equi r es mor e dat a t han
t he st r ai ght f or war d meas ur ement of pr i ce change f r om f i xed spec i
f i cat i ons,
adj ust ed f or qual i t y change.
i ndex i ncl udes l and val ue,
be publ i shed.
The pr esent l y publ i shed
but shor t l y an i ndex excl udi ng l and wi l l
The met hod has been succ es sf ul l y empl oy ed i n t he
ci vi l i an housi ng f i el d.
However ,
i t woul d appear t o be a wor t hwhi l e
appr oach f or DOD t o at t empt t o devel op t hi s not onl y f or housi ng,
f or ot her bui l di ngs,
but
such as hospi t al s and poss i bl y l abor at or i es
of var i ous ki nds.
The Census Bur eau i s al so devel opi ng an i ndex f or apar t ment
bui l di ngs,
r esi dent i al
based on t he same gener al
appr oach as t hat used f or
const r uct i on.
Ear l i er ,
t he Census Bur eau had under t aken exper i ment al
wor k
t o det er mi ne t he f eas i bi l i t y of pr i ci ng l ar ge apar t ment compl exes.
The met hods used wer e di f f er ent .
Pr i ci ng cons i s t ed of obt ai ni ng t he
cost of a st andar d vol ume of excavat i on,
el ect r i c i nst al l at i on,
st andar d amount of wal l ,
pl umbi ng et c . — i n shor t ,
obt ai ni ng cost
of speci f i ed uni t component s of t he out put and combi ni ng t hese i n
def i ni t e pr opor t i ons t o obt ai n t he pr i ce of a spec i f i ed st r uct ur e.
Thi s met hod i s not t he same as combi ni ng t he pr i ce changes f or s pe
ci f i ed uni t s of
i nput s— br i ck,
concr et e,
l abor ,
et c.
The out put
pr i ced and r e- combi ned . Thi s met hod,
i s,
i n ef f ect ,
br oken down,
if
successf ul
woul d pr ovi de an i ndex i n whi ch t he pr oduc t i vi t y change,
255
occur r i ng i n t he pr oj ect , woul d i mpl i ci t l y be t aken i nt o account .
Anot her
i ndex cons t r uc t ed al ong si mi l ar l i nes i s t he i ndex
of t he cost of const r uc t i ng a " composi t e mi l e" of hi ghway.
by t he Of f i ce of Hi ghway Oper at i ons,
( f or mer l y Bur eau of Publ i c Roads) ,
Feder al
Cons t r uc t ed
Hi ghway Admi ni st r at i on
t hi s meas ur e i s der i ved f r om
aver age bi d pr i ces f or f i xed amount s of excavat i on, sur f aci ng,
st r uct ur es.
di scount s,
Act ual
bi d pr i ces ar e col l ect ed,
and
and changes i n mat er i al s
pr oduc t i vi t y and pr of i t mar gi ns ar e i mpl i ci t l y t aken
i nt o account .
3.
Al t er nat i v es
I ni t i al
ef f or t s t o cons t r uc t a set of
i ndexes f or Mi l i t ar y
Cons t r uc t i on shoul d be devot ed t owar d ei t her t he hedoni c appr oac h,
exempl i f i ed by t he Bur eau of t he Census i ndex f or housi ng,
or t owar d
cost of a st andar d st r uct ur e by means of pr i ci ng i t s component s i n
pl ac e. I f such ef f or t s pr ove i nf easi bl e i n some cases,
t her e ar e
ot her avenues t o expl or e bef or e r esor t i ng t o i ndexes f or mat er i al s
and l abor .
I n essence,
How much wi l l
t he convent i onal
i t cost
i ndex number answer s t he quest i on:
t oday t o pur chase t he same ki nds and quant i t i es
of bui l di ng mat er i al s and l abor t i me t hat wer e pur chased some t i me
i n t he past ,
hol di ng f i xed t he quant i t i es at ei t her cur r ent pr o
por t i ons ( Paasche i ndex)
or pr opor t i ons of
t he past
( Laspeyr es i ndex) ?
Thi s i ndex does not al l ow f or past or ant i ci pat ed t echnol ogi cal
changes,
such as ef f ect s of subs t i t ut i ng modul ar uni t s,
cons t r uc t ed
256
o f f - s i t e ,
o r
even
s t i t u t i o n
o f
new
o r
Pa a s c h e
change
A
o f
s t a f f
to
sam e
to
show n,
com ponents
ponen ts
t o t a l
u n i t
cause
th e r e
m a te r ia ls
as
a l l
6 1/
o f
t h i s
q u e s tio n
com es
re p la c e
s im p ly
c o s ts ,
w ould
ab o u t
th e
m ore
be
a
Ro ys e ,
Jo h n
o f
p l a s t e r ) .
Th e
c o n ve n tio n a l
th e
in d e x
m ig h t
o r
be
sub
La s p e y r e s
w ith
no
ig n o r e d ,
re w e ig h tin g
is
be
o f
to
th e
a tte m p ts
to
A .,
Pr ic e s
De p artm e n t
o f
a
much
th e
t h a t
o f
b u ild in g
w i l l
as
be
u n t i l
and
t o t a l
w o th w h ile .
a
new
.T h i s
p lu s
s a vin g s
w hich
th e y
In p u t
Li v i n g
La b o r ,
in
Co s t
March
19 72 .
b u d g et
p la c e ,
to
C o n d itio n s ,
com plex
new
l a b o r ,
is
com
e f f e c t
o c c u r
on
be
in
sh ou ld
n o t
in n o va tio n s
th e
p ro b
and
e f f e c t ."
m i l i t a r y
c om ponents-
o f
th e
in d e x
re d u c tio n
in c re a s e
fo r m u la tio n
r e p o r tin g
" Th e
th e
w i l l
an
c o n tr a c
th e
o f
I f
'
s a y:
th e
c o s t
Th is
and
e a r l y
th e
u n i t
p ro d u c ts
la b o r
to
p e rfo rm
m a te r ia ls .
assu re
p r ic e
by
in tr o d u c tio n
m a te r ia ls
.
t h i s
re p la c e d ? "
m isse d .
o n -s i t e
p aid
w ou ld
b ein g
assu re
had
be
w hich
is
in d e x
in
m ust
r e s u l t
usual
th e
" M a te r ia ls
and
S t a t i s t i c s
w hich
m ust
r e d u c tio n
m ethods— h e d o n ic ,
O f f i c e
item s
m a te r ia ls
l a b o r ,
a lth o u g h
w i l l
how
as
in to
in c lu d in g
in n o va tio n
s e rio u s
in to
La b o r
m a te ria l
s p lic e d
e s tim a te s
th r e e
U .S .
q u a n t i t y
t h i s
o f
e s s e n t i a l l y
answ er
problem
new
and
th e
reassessm en t
Bureau
o f
lem — th e
in
lin k e d
o r
g en eral
u n i t
th e
As
is
p u rc h a s e d ,
o b ta in
l e v e l ,
th e
th a t
f a l l — i f
to
be
a
to
a re
o f
posed
when
la th e
com ponents
e i t h e r
a
f o r
in d e x.
paper
fu n c tio n
o r
in d e x
fo rc e d
purchase
re q u ire d
w ou ld
in
th e
q u e s tio n
t o r
is
in d exes
m agnitude
re sam p lin g
p la s te r b o a r d
m a te r ia ls
in d ic a te d
t h e i r
" Th e
u s in g
th e
and
g e t
a
u n derw ay.
m o d ifie d
Co n s tr u c tio n
Bureau
o f
La b o r
I n d u s t y ,"
S t a t i s t i c s
25 7
in p u t
o f
p r ic e
r e p o r tin g
b u tes
fro m
o f
in d e x
o f
fin is h e d
th e
Ch a p te r
is
th e
in
term s
k in d
I I .
o f
m a te r ia ls
c e p tu a lly
A
t h a t
n o t
a ,b ,
h is
t h a t
to
u n i t s .
reduc ed
is
view
som e
d ata
r e a d i l y
a d a p tio n
on
a t t r i
a v a i l a b l e
be
term s
o f
com m on
t o t a l
in p u t
asp e c ts
in p u ts
h ave
been
a n o th e r
am ong
u sed .
say
o f
o r
w ay
use
am ount
n u m e ra ire ,
th e n
c o u ld
be
e v i d e n t l y ,
w ou ld
n o t
is
i t
e q u iva le n c e
th e
o f
o f
such
exp ressed
va r y
o f
even
as
i t
th e se
th e
in
am ount
fi x e d
o f
th e
W h en ever
is
c on
Su p p o s e
m ore
each
Dac y)
in
c o m b in atio n
w ou ld
o f
b r i e f l y
rem ains
in p u t.
a
by
an
r e s ta t i n g
w a y.
o r
one
th e
e x i s t s ,
a n o th e r
s u b s t i t u t i o n ,
e xp re ss
o u tp u t
m a te r ia ls
a c tu a l
Sin c e
a tte m p t
d e s c rib e d
t h a t
m a te r ia ls
Th e
p r i c e s .
d e n o m in ato r
a n d ,
is
p h ys ic a l
to
re q u ire m e n t
" To
' x 1 one
be
to
s t a t e s :
p ro d u c t
t h e i r
a b le
m a te r ia ls
j u s t
was
to
(a c k n o w le d g e d
in
can
th e
approach
o f
i t s e l f
in d e x
problem
c
o f
Th is
th e
and
by
p re s e n t
p r o p o r t i o n a t e
s ta n d a rd
to
u n its
He
a
m easure
v a le n t
r a t i o
s u b s t i t u t i o n
te c h n ic a l
a
th e
been
d eterm in ed
a
m ay
o f
o f
l i k e
,
a re
l i m i t a t i o n
f o r
w ou ld
62/
th e se
i f
o p p o r tu n ity
o u tp u t
m an u fac tu re
h ave
n e c e ssary
Da c y.
h e lp fu l
m a te r ia ls
to
p o s s ib ly
th e
by
n o t
p o s s i b i l i t y
th e
in c lu d in g
p ro vid e
su gg ested
p h ys ic a l
has
assu m p tion
w ith
to
p r o j e c t ,
th e
assum ption
be
a tte m p te d ,
c o n tr a c to r s
a d d i t i o n ,
w i l l
be
c o n tr a c ts .
in
th e
sh o u ld
from
th e
th e
In
a
in d e x
o f
m a te r ia ls
concerned
be
c o n ve n ie n t
in p u ts .
r e q u ir e d
in p u t
in
'a '.
n u m eraire
though
On e
th e
Th e
e q u i
s p e c i fi c
a l t e r e d ." — ^
Da c y ,
Do u g la s
neous
P r o d u c t ,"
C .,
"A
Pr ic e
o p .c i t .
and
pages
P r o d u c t i v i t y
4 71-4 72 .
In d e x
f o r
a
No n h o m o q e
25 8
I t
is
s e rio u s
en c o u rag in g
a t t e n t i o n
p r o j e c t s .
change
In
th e
sourc es
an d :
a
p r ic e
th e
a
th a t
problem s
o f
o b ta in
19 72
c o n tr a c to r
a
w ent
o f
h avin g
c o n s tr u c tio n
D OD
h ave
on
been
p r ic in g
g ivin g
o f
c o n s tr u c tio n
m ore
r e a l i s t i c
m easure
beyond
r e a d i l y
a v a ila b le
to
e xp la in
com m unity
p r o je c ts
a t
w ould
w i l l i n g
be
s t a f f
a tte n d a n t
Ar m y
r e s u l t
D OD
FY
n ote
to
a tte m p t
"As
a l l
p ru d e n t
th e
De p a rtm e n t
r e p e a te d ly
to
an
to
to
had
m ost
th e
to
c o s t
b id
when
p r ic e
se c on d ary
ad ju stm en ts
a r r iv e d
a c c u ra te
o f
a t
th e
p r ic e
th e
d e c is io n
w hich
c o n tr a c t
was
63/
a c t u a l l y
o f f e r e d ."
used
by
fro m
p r o to typ e
In
in
th e
A
Bureau
19 6 8 ,
m i l i t a r y
p r o p e r l y ,
o f
b l u e p r i n t s ,
g e o g rap h ic
is
I f
"
. . .
a d d itio n a l
based
t h i s
d e s c rib e d
s t a t i s t i c s
c o n s tr u c tio n
I t
s t r u c tu r e s .
to
seem s
S t a t i s t i c s
s a id
c o n s tr u c tio n
le ad
m ethod
La b o r
W inestone
m ay
e s tim a te d .
Th is
on
p r ic e
to
in
i t
is
is
ta k in g
sourc es
in d e x
e f f o r t
be
g re y
o f
to
p lac e
p r ic e
a
n ote
a
Se c tio n
th a t
in
y e a r
m ethod
c a s tin g
w h ic h ,
s ta n d a rd
c o n tin u e d ,
th e
I I I ,
d ata
s in g le
f o r
to
ir o n
Ch a p te r
w o rth y
f o r
is
r e la te d
p r ic e
above
s p e c ific a tio n s
re se arc h
to
D.
re s e arc h
i f
fo c u s e d
th e
fu t u r e .
has
been
m i l i t a r y
tim e
s e rie s
m ay
64/
be
a v a ila b le
appears
to
fo r
h ave
c o n s tr u c tio n
.
.
.
d e fl a t i o n
r e s u lte d
program s.
in
a
Pe r h a p s
p u r p o s e s ."
So
fa r
g u id e
to
th e
p r e p a r a tio n
som e
o f
th e
th in k in g
t h i s
o f
and
e f f o r t
m i l i t a r y
s k i l l
th a t
65/
t h i s
e n ta ile d
6 3 / " U .S ,
6 4/
Ar m y
" M i l i t a r y
65/ _ Se e
o f
be
Budget
Pr ic e
" M i l i t a r y
O ffi c e
and
can
th e
Ho u s in g ,
exten d ed
to
M i l i t a r y
Pr ic e
I n d e x ,"
o p .c i t .
Co n s tr u c tio n
De p u ty
Au g u s t
the
Co s t
As s i s t a n t
19 73 .
m easurem ent
In d ic e s ,
page
FY
o f
p r ic e
19 73 "
tr e n d .
o p .c i t . ,
page
12 2
33.
Re vie w
Gu id e "
Se c r e ta r y
o f
( D OD
Defen se
4 2 7 0 .1 - C G ) ,
In s t a l l a t i o n s
.
259
4 .
C u r r e n tly
De s p ite
c a r r ie d
th e se
used
th e se
e f f o r t s
D e fla to r s
e f f o r t s
to
th e
De p artm e n t
f r u i t i o n .
C u r r e n tly
o f
i t
De fe n se
uses
has
n o t
sec on d ary
sou rc e
66/
in d exes
t o t a l
fo u r
as
D OD
d e fl a to r s
b u d get
q u a n titie s
fo u r
and
o f
s t e e l .
m ade
Th e
Th e
fo r
by
c o n s tr u c tio n
m eans
Th e
n o t
o f
an
b u d g e t.
un w eighted
Th e
average
o f
f o r
o f
a
A .
c o n s tr u c tio n
c o s t
e xp e rie n c e
c o n d itio n s ,
o f
Fu l l e r
h e a tin g ,
Tu r n e r
I t
i t
som e
la b o r
Ec o n o m i c s
o f
De fe n se
d e s c r ip tio n
l a t t e r
Co m m e r c e
d e s c rib e d
De fe n se
" S ta ti n g
c o n ta in s
m a in ta in s
h e re .
o f
p o r tio n
c o n c r e te ,
l i g h t i n g ,
a d ju stm e n t
D OD
Hig h w a y
d e s c rib e d
c i t i e s
and
and
s ta te m e n t,
is
a
Lo o k
19 72 ,
FY D P
in
" Fo r
I t
in c o r p o r a te d .
on
a t
th e
b u i l
f i r m 's
c o m p e titive
th e
and
R e a l i t i e s ,
th e
Co n s ta n t
th e
o f
p r o d u c t i v i t y .
m i l i t a r y
is
e le m e n ts ,
em ployee
p r i c e s ,
and
c o s t
36
m easure
based
Ju l y
s e r i e s ."
and
e s tim a te
m anagem ent,
o f
s tr u c tu r a l
m a te r ia ls
Sp e n d in g — A
Budget
s p e c ia l
and
Ad m in is tr a
above.
p r ic in g
C o .— r e p r e s e n t s
(Co m p tr o lle r )
th e
a
an
v e n t i l a t i n g ,
r a t e s ,
p la n t
o f
is
p r o d u c t i v i t y
e a s te rn
c o n c e rn in g
( Fe d e r a l
b u i l d i n g s ,i n c l u d i n g
o f
Th e
b i l l
s tr u c tu r a l
b r i c k ,
th a t
C o .- - r e p r e s e n t s
Co n s tr u c tio n
in
Ro a d s
r o a d ,
e ffi c i e n c y
De p artm e n t
d e ta ile d
h e a tin g ,
r e p o r te d
p lu m b in g ,
has
c o s ts
a
th e
fra m e ,
p lu m b in g ,
is
on
in to
b u i l d i n g s :
c o ve r
m ile
w i r i n g ,
A l s o ,
e n te re d
Pu b lic
com m ercial
c o s ts .
C o .- - b a s e d
change.
th r e e
d in g
Th e
does
o f
e l e v a t o r s .
Ge o r g e
d .
Se e
l a b o r ,
typ e s
Bureau
i n d e x ,
in
e l e v a t o r s ,
o r
Ap p r a is a l
and
p r o d u c t i v i t y
c .
b e n e fi t
in d e x
system
t i o n ) — Th is
elem ents
Am e r ic a n
m a te r ia ls
b .
66/
m i l i t a r y
d e fla te d
r e p r e s e n ta tiv e
s p r i n k l e r
is
th e
in d e xe s :
a .
o f
is
o f
a tte n d a n t
P r i c e s ."
c o n s tr u c tio n ,
4 - in d e x
averag e
260
5 .
Re c o m m e n d a t i o n
D i f f i c u l t i e s
s t r u c ti o n
h ave
S t a t i s t i c s
been
Re vie w
o f
c o n s tr u c tin g
r e c o g n i ze d
Co m m itte e
o f
end
p ro d u c t
f o r
m any
y e a r s .
th e
Na tio n a l
p ric e s
In
19 6 1
Bureau
o f
fo r
th e
con
Pr ic e
Ec o n o m i c
6 7/
Re s e a r c h
m ent
by
o f
th e
re p o rte d
to
Co m m e r c e
Bureau
p re h e n s ive
o f
th e
Th is
th e
sou rc es
a re
sou rc es
p r ic e s
m ade
p aid
by
p ric e
e xp e n d itu r e
Sin c e
m easurem ent
f o r
l a s t
6 7/
in
in
t h a t
f o r
is
no
be
th e
tim e
lo n g e r
o f
to
f o r
in
o f
l i t t l e
h ou sin g
o f
e n t i r e l y
case
w ith
p r ic e
in to
e n t i r e l y
on
Th e
c om m ittee
urged
a c tu a l
o f
ve ry
w ay.
o f
sec on d ary
i t ) ,
and
th a t
tr a n s a c tio n
s p e c u la tive
and
th e se
r e
p r ic e s —
b u i l d e r s ,
c o n s tr u c ti o n ,
th e
th e
to ta l
c o n s tr u c tio n .
done
to
m ount
a
e x c e p tio n s ,
and
th e
in d e x
c om posite
on
a
com
s k im p ie s t
f o r
h ou sin g
dependent
th e
a
p o s s ib le
c o lle c te d
in d e x
S t a t i s t i c s ,"
t h a t
is
De p a rt
c om piled
f o r
been
som e
th e
I t
e ve ry
depends
a c c o u n t
been
now
s u b s t i t u t e
alm ost
c o n tr a c t
has
" Th e
in d e x ,
a v a i l a b l e .
o b ta in in g
fo r c e
Bu d g e t:
c o s t
fa c t
I t
e ve r
r e s id e n tia l
Pr ic e
in
th e
i t .
th e
c o n s tr u c ti o n ,
Th e
now
d e f e c t i v e ."
in c o rp o ra te d
" Go v e r n m e n t
o f
c lo s e s t
in d e x
h ave
case
case
r e s id e n tia l
w i l l
d ata
th e
th e
a p a rtm e n ts .
in d e x
d e vo te d
b u ye r
th e
d e fe c tiv e
a v a i l a b l e
th e
is
r e s u l t
o r d i n a r i l y
be
c o n tr a c t
Ce n s u s
been
o r i g i n a l
th an
Bureau
p r ic e
b ein g
i n e v i t a b l e
h ave
(n o
m ore
Ce n su s ,
c o n s tr u c tio n
s u b s t i t u t e ,
re s o u rc e s
U .S .
'c o m p o s i t e 'c o n s t r u c t i o n
d i s t a n t
is
th e
p .
such
as
fo rth c o m in g
is
and
in d e x
sec on d ary
o p .c i t . ,
program
8 7.
th e
so
o f
p r ic e
th e
in d e x
ap artm e n t
t h a t
s o u rc e s .
th e
S t i l l ,
26 1
6 8 /
th e
c o m m i t t e e 's
m ajo r
Because
th e
im prove
a r e a ,
be
own
e s tim a te s
a lo n g
th e
lin e s
and
m ig h t
s tr u c ti o n
J .
be
p r ic e
Fa m i l y
Th is
fa m ily
tio n
o th e r
to
by
in
e x i s t i n g
tim e
a b o ve .
to
Ef f o r t s
u n d e rta k e n .
im provem ents
th e
in d e xe s ,
c i v i l i a n
A
POD
im provem ents
in
m ade
sh o u ld
e a r l i e r
b y -p r o d u c t
in
c o u ld
program s
o f
to
D OD
t h i s
le a d e r
m easure
con
econom y.
De fe n se
a p p r o p r ia tio n
"fin a n c e s
p rogram .
a p p r o p r ia tio n
v a l i d .
d e vo tin g
e f f o r t s
encourage
Ho u s in g ,
o f
o u tlin e d
change
h ou sin g
rem ain
l i m i t a t i o n s
i t s
r e vive d
s h ip
o f
com m ents
th e
expen ses
Fu n d s
p ro vid e d
a c ts
under
th e
t h i s
ac c ou n t
in
t i t l e ,
o f
annual
th e
m i l i t a r y
m i l i t a r y
'Fa m i l y
c o n s tr u c
Ho u s in g ,
d e fe n s e '
69/
are
tr a n s fe r r e d
Am o n g
hom e
th e
to
program s
f a c i l i t i e s ,
j e c t s ,
fa m ily
and
b u ild in g
o f
and
a u t h o r i ze d
prem ium s.
Th e
a p p r o p r ia tio n
68/
19 72
d i r e c t
Dep artm en t
th e
c om posite
fu t u r e .
69/
Th e r e
o f
and
o f
s u rp lu s
o f
fa m ily
in c o r p o r a te
p r o d u c t i v i t y
Budget
o f
be
a
m o b ile
r e la te d
p ro
h o u s in g ,
le a s in g
o f
h ousin g
le s s
in
fo r e ig n
m ortgage
th an
one
in s u ra n c e
p e rc e n t
o f
D OD .
has
to
o f
and
s e r vic e m e n ^
f o r
e x p e n d i t u r e ."
c o n s tr u c tio n
com m odity
ac c ou n ted
o f
and
h ou sin g
p lan s
w i l l
U .S .
h o u s in g ,
Co m m e r c e
r a t i n g
th e
new
e x i s t i n g
paym ent
o b lig a tio n s
Th e
o f
o b l i g a t i o n
m ain tenanc e
c o u n tr ie s
FY
are
im provem ent
o p e r a tio n
h o u s in g ,
in c lu d e d
f o r
h ig h e r
a d ju stm e n t
Go v e r n m e n t ,
review ed
th e
in d exes
changes
p r o p o r tio n
o f
in
l i s t .
th e
Fi s c a l
new
y e a r
in
in d exes
19 74
com posing
th e
n ear
in c o rp o
262
Th e
p r i n c i p l e s ,
a p p r o p r ia tio n
" M i l i t a r y
K.
Th is
o f
fo r
s e r vic e s "
w hich
p r i n c i p a l l y
a p p ly
under
to
t h i s
th e
h e a d in g ,
"e xp e n s e s ,
c i v i l
and
n o t
d e fe n se
fi n a n c ia l
o th e rw is e
a c t i v i t i e s ,
c o n tr ib u tio n s
p ro vid e d
in c lu d in g
to
th e
f o r ,
th e
Sta te s
70 /
p u rp o s e s ,
4 1 .8
and
as
a u t h o r i ze d
p e rc e n t
a n o th e r
o f
3 8 .6
by
t o t a l
l a w ."
d i r e c t
f o r
p e rc e n t
o b lig a tio n s
" g r a n t s ,
are
fo r
s u b s id ie s ,
c o n t r i b u t i o n s ."
Because
o f
o u t
v e h ic le s ;
J ^
d e fe n se
Ap p ro xim a te ly
and
e ls e w h e re ,
c o ve rs
c a r r y in g
m otor
.
..
c i v i l
" o th e r
problem s
De fe n s e
a p p r o p r ia tio n
n e c e ssary
,
f o r
c overed
and
C o n s t r u c t i o n ."
C i v i l
h ir e
are
c o n c e p ts ,
th e
L.
t o t a l
t h i s
D OD
Re vo lvin g
1•
b u d g e t,
and
o f
consum able
to
r e p a i r )
c u s to m e rs .
D OD
f o r
o f
s to c k
fu n d s
re s a le
and
to
th e
in v e n to r ie s
w o rld w id e .
Th e
s to c k
m a te r ia ls
f o r
use
sum able
70 /
I b i d .
71/
I bi d.
in
ac c ou n ts
s p e c ia l
fo r
o n ly
a t t e n t i o n
ab o u t
need
be
one
p e rc e n t
g ive n
to
i t .
Fu n d s
De fe n se
m a te r ia ls
Th e s e
no
Managem ent
De p artm e n t
Th e
v i t i e s
a p p r o p r ia tio n
Sto c k
Fu n d s
"fin a n c e
th e
s u p p lie s
(ite m s
m i l i t a r y
a re
fu n d s
case
w hich
s e r vic e s
sto c k e d
a ls o
o f
a c q u is itio n
and
and
s o ld
fin a n c e
are
o f
uneconom ical
o th e r
a t
in ve n to r ie s
a u t h o r i ze d
d e fe n se
in v e n to r ie s
m o b i l i z a t i o n ."
o f
a c t i
con
263
In d u s tr ia l
2 .
Fu n d s
"De p a rtm e n t
p e rfo rm in g
o f
i n d u s t r i a l
s a b le
b a s is .
r i e t y
o f
W ork
s e r vic e
c o m p le tio n
o f
De fe n se
o r
com m ercial
o rd e rs
are
a c c o u n ts ;
th e se
i n d u s t r i a l
re c e ive d
th e
o r d e r s .
typ e
fu n d s
Th e
a t
fu n d s
fu n c tio n s
th e
on
a c t i v i t i e s
a
re im b u r
a c t i v i t i e s
p ro vid e
c ustom er
fin a n c e
w o rk in g
th e n
from
a
c a p ita l
reim bu rses
va
f o r
th e
th e
a c t i v i t y
72 /
th ro u g h
p ro g re s s
Ex a m p l e s
c r a f t
r e -w o r k
paym ents
in c lu d e
fo r
Ar m y
f a c i l i t i e s ,
th e
f u l l
p ro d u c tio n
d e p o t m aintenance
ordnanc e
c o s t s ."
f a c i l i t i e s ,
s t a t i o n s ,
p r i n t i n g
Na vy
a i r
p l a n t s ,
and
la u n d r ie s .
3 .
Managem ent
Th e s e
Fu n d s
fu n d s
w ere
c re a te d
" to
s i m p l i fy
th e
fin a n c in g
and
73 /
ac c o u n tin g
Th e
Ar m y
f o r
fu n d
W ash in g to n ,
in
Eu r o p e ;
s u p p lie s
A i r
Fo r c e
"s id e
72 /
I b i d .
73/
I bi d.
p r e s e n tly
D .C .,
th e
fu n d
su p p o rte d
fin a n c e s
Na vy
fu n d
and
c overs
r a d a r
equipm ent
j o i n t
subsystem
Oth e r
Fu n d s ,
T r u s t s ,
Th e s e
a re
sm all
o f
tw o
s e r vic e s
fin a n c e s ,
th e
by
De fe n se
tr a n s p o r ta tio n
m a t e r i a l s ,
lo o k in g
4 .
o p e ra tio n s
o r
m ore
te le p h o n e
and
th e
Na vy;
U .S .- F e d e r a l
im provem ent
s e r vic e
c o n s tr u c tio n
p r i n c i p a l l y ,
o f
a p p r o p r i a t i o n s ."
in
a c t i v i t y
tr a n s p o r ta tio n
and
th e
Re p u b lic
much
o f
o f
s m a lle r
Ge r m a n y
p r o g r a m ."
G i f t s
d o l l a r
va lu e
and
a re
n o t
d e a lt
w ith
h e re .
264
5 .
Na tu re
Th e s e
to
ju s tm e n t
p e rio d s
w ith in
th e
w ith
Th e
problem
and
fo r
s to c k
th e
th e
o f
Th e
o f
va lu e s
o u ts id e
th e
do
to
D OD
h an d le
w e ig h ts
fu n d s ,
vie w
can
s e rve
be
e xc e e d ,
as
an
n e g a tive
in
in
v a l u e ,
ad
"s a le s "
in to
e a r l i e r ,
Th e
r e s a le
p r ic e
h o ld
n o t.
in
in d e x
la r g e
c o n n e c tio n
seem s
to
be
i n v e n t o r i e s ,
m ore
than
So m e p e r t i n e n t o b s e r v a t i o n s
in v e n to r y
so
e xp e n d itu re s
c o in c id e
do
a
fu n d s
a r e :
p u t
n o t
th e se
f o r
w hic h
w hich
fu n d s
Pr o d u c ts
o r
how
fu n d s ,
s to c k
ye a r s
o b lig a tio n s
d a ta
p o in t
Issu es
o f
p r ic in g
a .
p r ic e
c e r ta in
fro m
Fu n d
in d u s tr ia l
num ber
a
a c c o u n t.
purchases
Sto c k
c o n c e rn in g
a
from
b u d g et
Th e
b oth
th e
Fu n d s
De p artm e n t.
im p o rta n t
f o r
th e
fu n d s
th e
when
6 .
o f
t h a t
m ade
in
m ay
t h e i r
a
p o in t
h ave
m arket
y e a r
o r
o f
tim e
been
purchased
p ric e s
m ore
a p p ly
e a r l i e r ;
w ith
to
i .e .,
d o lla r s
to
the
be
d e fl a te d .
b .
s e r vic e
n ie n c e s .
f o r
n o t
Th e
r e p re s e n t
p r ic e s
r e p r e s e n ta tiv e
l o s s ,
are
do
p lu s
f i r s t
p e r i o d i c a l l y
c .
Th e
fro m
m arket
charged
by
d e s tin a tio n
th e
p r ic e s
th e
q u a n t i t i e s ,
fu n d s
b u t
s to c k
p lu s
a
to
are
fu n d s
branches
a c c o u n tin g
are
su rc h arg e
t r a n s p o r t a t i o n .
th e
Th e
c onve
"s ta n d a rd
to
c o ve r
o f
p r ic e s "
in ve n to r y
"s ta n d a rd
p r ic e s "
u p d ate d .
t o t a l
(s o m e tim e s
n e g a tive )
th e
d o l l a r
a c tu a l
p r ic e
o f
d o lla r s
s a le s
am ounts
o f
show n
and
in
th e
r e c e ip ts
purc hases
fro m
b u d get
and
do
a re
n o t
o u ts id e
n e t
fig u r e s
re p re s e n t
D OD .
265
Tw o
p o s s i b i l i t i e s
s a t i s fa c t o r y .
and
Th e r e fo r e ,
c on c epts
On e
a re
c h o ic e
s to c k
fu n d s
w ou ld
c o n s is t
th e y
o f
buy
th e
as
and
th e
In
e s s e n c e ,
as
b ein g
e i t h e r
o th e r
v a lu e -w e i g h ts
th e
am ounts
th e
d ou b le
D OD
and
Both
va lu e s
be
a p p lie d
p r ic e
to
to
r e s o u r c e s ,
va lu e
used
and
o f
As
to
th e
p lu s
in
s e r vic e s
w hat
th e
w e ig h ts
p r i c e s ,
th o se
purc hases
o u ts id e
D OD
fro m
th e
c on ve n ie n c e )
p r ic e
o u ts id e
purc hases
t h i s
th e
to
( fo r
to
be
o f
o f
w o rld
w ou ld
purc hases
m ethod
va lu e s )
purc hases
o u ts id e
o b l i g a t i o n s .
c a lls
tim e
be
o f
o f
approach
be
o f
va lu e s
fu n d s .
w ould
A
a p p ly
purc hases
to
fro m
th e
s to c k
fu n d s .
t r e a ts
th e
s to c k
fu n d s
use
(w h e n
d e fla te d
o f
s to c k
fu n d s '
Th is
o f
by
w ould
fro m
c h o ic e
m ore
p u rc h ases)
purchased
o f
i n t o
h ave
th e
s to c k
keeps
th e
p r i c e s .
s lo w ly
w ou ld
show
up
t o t a l
be
Sto c k
in
va lu e
D OD
fu n d
in d e x.
by
o r d e r
Fu n d
m arket
as
p ro d u c t
reduced
fu n d s
Sto c k
r i s i n g
th e
purc hase
th e
to
by
th e s e — by
s to c k -fu n d
com bined
nonm arket
a
item s
In d exes
u s in g
s e r vic e
purc hases
c o u n tin g .
p r ic in g
p u rc h a s e .
w ou ld
each
t h e i r
a vo id s
f o r
c o n s tru c te d
va lu e s
th e
Th e
fu n d s .
in d exes
in d exes
Th e
o f
p r i o r i t i e s ,
(b u d g e t
th e
ve r s io n
th e
Th e s e
c o m p le te ly
D OD .
g ro u p in g s — w ou ld
w e ig h ts .
w e ig h ts
fro m
p r ic in g
c h o ic e
a t
am ong
buy
r e s a le
purc hases
fu n d s
a vo id
w ou ld
t h i s
o u ts id e
Th e
s to c k
th e y
m a r k e t-p r ic e
o u ts id e
th e
s e r v i c e 's
s to c k -fu n d
sam e
t r a d e - o f f s
a p p r o p r i a ti o n s .
s to c k
w o rld
o f
som e
ig n o re
w h at
th e
m o d ific a tio n
both
o f
th e m se lve s— n e i th e r
o r d e r :
w ould
a p p r o p r ia te
o u ts id e
th e
in
se p a ra te
fro m
th e
p re s e n t
to
w ith in
p r o f i t
p r ic e
q u a n tity
in d e x
(c o n s ta n t
266
d o l l a r )
th e
in c re as e s
s to c k
fu n d
p resum ably
Th e
t r e a t i n g
appears
e v e r ,
As
a
a
c h o ic e
in te r n a l
do
w o rk in g
l a t e r
" p r o f i t "
second
to
one
D OD ,
tr a n s la te d
c h oic e
c h o ic e
to
a t
w ould
in to
be
new
has
w ould
i t
be
m ay
any
tr e a te d
p h ys ic a l
as
as
s e r v ic e .
a
appeal
genuin e
in
p u rc h a s e s.
d i f f i c u l t
th e
o m it
p r o j e c t ,
th e
i t
c h o ic e
s to c k
le a vin g
a vo id s
Ch o ic e
m ore
o f
w o rd s ,
in c r e a s e ,
t h a t
c o n s id e r a b ly
to
o th e r
in v e n to r y .
does
w is e r
In
q u a n tity
th an
be
to
one
c o n c e p t
in c e p tio n
r e fin e m e n t.
to
c o n s id e ra b le
vio le n c e
m odel
th e
n o t
tr a n s a c tio n s
le s s
tw o
b u t
to
tw o
o n e .
Ho w
a c c o m p lish .
fu n d s
and
adopt
c h o ic e
tw o
fo r
267
V I I I ,
A.
Th e
Ba sic
good
to
th e
sourc es
w ith
le s s
g lean ed
c u r r e n t l y
c o n c lu s io n
and
t h a t
used
d e fl a to r s
in
r e a l i t y
th e r e
fro m
m easure
o f
fo r e ig n
fo r e ig n
g e n e ral
p r i v a t e
r e p o r t
fo c u s e s
ve r y
a re
Th e
in a tio n
p u rc h a s e s ,
f o r
d e fe n s e
a re
m any
e xp e n d itu re s
cooks
b u t
l i t t l e
p r i o r i
reason s
p o r tr a y
fe n s e
o f
De fe n se
has
th e
D OD
U .S .
d e ta i le d
le ad
fo r
to
th e
d e fl a to r s
p a tte r n
p r ic e
n a tio n s
on
De p a rtm e n t
c o u n tr ie s .
s e c o n d a r y -s o u r c e
(Da ta
a re
p r ic e
p r ic e
p r ic e
w ith
by
som e
m ade.
m i l i t a r y
c o n s tru c te d
Th e
and
and
On
d i f f e r s ,
m e th od s,
De fe n se
En o u g h
was
t h a t
a p p lie s
d a ta
th e
o f
b e l i e f
in
b u t
th e
la r g e
th e
a p p lic a b le
fa b
to
th e
l i t t l e
p r i v a t e -s e c t o r
can
draw n
a
a l l
p o s s ib ly
o r
q u a l i t a t i v e
b as is
q u e s tio n
Th is
i s
due
fro m
o th e r
m arkets
p rim a ry
c i v i l i a n
o th e r
th a n
p e r s o n n e l,
on
o f
t h e i r
as
th e r e
th o se
in
D OD 's
own
th e
a re
a
t o t a l
c o n s tru c te d
w hich
( s t a t i s t i c a l l y
w here
h i s
th e
a lm o s t
and
exam
d e fe n s e
s e r io u s ly
program s
e xc e p tio n
d raw in g
to
p a r t
fro m
m is le a d in g
to
draw n
m easures
o f
be
t e s t s )
m easu res.
econom ic
w h ic h
in d ic a to r s
in a d e q u ate
in d e xe s
in
c o n c lu s io n ,
m ovem en t.
c u r r e n t
a re
is
U .S .
o th e r
to
Th e
m i l i t a r y
s i tu a ti o n s
purc hases
in
th e
h o w e ve r,
u n ive r s a l
th e y
o f
p ro xy
c o n c e p tu a lly )
on
(b u ttr e s s e d
m ovem en ts
on
v i s -a -v i s
o f
s u b s t a n t i a l l y
i n c l u d e d .)
th a t
m easures
r e lia n c e
s o u r c e s ,
n e a r ly
t o r i c a l
p r ic e
s i t u a t i o n
in d e xe s .
e x i s t i n g
is
problem s
p e r s i s t s .
n o t
m ost
o f
th e
r e lia n c e
econom y
a c t i v i t y
on
p o rtra ye d
to
t h i s
c o n c e p tu al
em phasis
s i t u a t i o n
o f
o f
n e c e s s i ty ,
d a ta
to
R EC O M M EN D A T I O N S
b r o th .
Of
r i c
AND
Ne e d s
Ex a m i n a t i o n
le ad s
C O N C LU S I O N S
b u t
d e
n o t
De p artm e n t
e xp e rie n c e
and
268
d a ta .
Ev e n
h ere
Oth e r w is e ,
to
a
p r ic e s
o f
p r o d u c ts ,
s p e c ia l
m easure
to
th e
m easures
f a i l
ia n
purposes
fo r
th e
o f
m i l i t a r y
d e fe n s e
to
body
and
say
t h a t
th o u g h t,
op in g
d e t a i l s
th e
in
s ta n c e s .
p r ic e
c o n n e c tio n
Bu t
d a ta .
p r ic in g
is
1•
Th is
because
th e
m easures
m ay
A t
and
by
w o r s t ,
th e
p ro d u c ts
m i l i t a r y
o r
t h e i r
in
in te n d e d
do
areas
o r
a t
c o m p o n e n ts -o f
n o t
l i k e
even
purposes
r e f l e c t
s p e c i fi c a t i o n s ,
in d ic a to r s
t h i s
c o n c lu s io n
th o se
and
b oth
use
th e
d is c o u n ts ,
c o n s tr u c tio n
f o r
h ave
d i l i g e n c e .
been
th e
c i v i l
p ro d u c ts
d i f f i c u l t
s u ffe r e d
h o ld s
t r u e
and
from
no
in d e xe s
been
to
p r ic e
f o r
la c k
m a tte r
o f
b udget
w ith o u t
any
n e c e ssary
c on c e p t
is
con
to
m e th o d o lo g y,
w hich
th e
Th is
d evoted
under
by
w ith o u t
e xp e n d itu r e s .
has
to
sh ared
and
c o n s tru c te d
Ef f o r t
s tr u c tu r e s
is
w ith in
va r io u s
c o n s ta n t-p r ic e
in d exes
o b s e r va tio n
s e rve
s p e c i a l i ze d
sh ow s,
o f
h ave
by
re m ain .
in te n d e d .
w e ig h tin g
w ith
purchased
c i v i l i a n
m ovem ents— t h e y
c o n s tr u c t
and
th o se
q u a l i t y
d e ve l
espe
c irc u m
b a s ic
o f
d e s ir e d .
Ch o ic e s
o f
Pr ic in g
On c e
is
r e c o g n i ze d
a b le — because
and
a l l
a re
c u r r e n t
o f
p r ic e
in d exes
c a re
o f
s a t i s fa c t o r y
a n a ly s is
som e
b e s t
p r ic e s
r e p o r t
who
c h an gin g
m a t e r i a l s --i n p u t s
p u rc h ase .
t h i s
g e n e ral
a re
vo lu m e ,
th e y
p r ic e
s id e r a b le
c i a l l y
o f
c o n c e rn in g
th o se
th e se
p ro vid e
e s ta b lis h m e n t,
p la n n in g
n o t
d e fe n s e
w hich
As
w hich
to
a t
to
c i v i l i a n
as
to
a re
s i m i l a r
W h ile
c irc u m stan c e s
p e c u lia r
u sers
typ e
p u rc h ase d .
a d e q u a te ly— to
q u e s tio n s
m ovem en ts
o f
p ro d u c ts
e t c .,
p r ic e
be
ju d g ed
w o rs t
th e
c o n c e p tu al
i t
d i f f e r e n t
th e
" s t a t e
Co n c e p ts
c on c e p tu al
o f
th e
a r t "
t h a t
an
needs
o f
id e a l
r e q u ir e
p r ic e
and
p r ic e
m easure
d i f f e r e n t
q u a n tity
is
k in d s
u n a tta in
o f
m easurem ent
in d ex
269
p re c lu d e
becom e
som e
p o s s ib le
On e
l i t t l e
p ro s p e c t
m easure
th e
(b )
c o n s ta n t
s e c u r i t y ,
is
o f
d e fl a t o r
be
o f
by
a
no
t o
no
op p o sin g
a
o f
goods
o f
o r
in d e x
m ore
o f
(th e
r e a l i s t i c
so
w hich
to
th an
th e
be
o r
by
m eans
e x p l o s i v e s ).
a
w ou ld
Th e s e
o f
w ould
r e l a t i v e
w h ic h
w hat
c le a r in g
o f
an
m a n -h o u r s
p e r
u n i t
t h i s
seem s
n a tio n a l
to
o f
Th e
p r o d u c t i v i t y
use
fo r
buys
area
f o r e s t ) .
o f
w ould
a d ju s te d
D OD
th e
o f
Be
d o u b le
t i e
m easure)
q u a n t i t y
c h an g e.
B EA
c o n s is t
Ex p e c t a t i o n
buck"
n a tio n a l
purc hases
m ile s
a p p l i e d ,
(h e ld
p r ic e -c h a n g e
th e
u t i l i zi n g
sq u are
m ade
c o n s titu te s
m e asu re,
o f
"n "
w hat
o u tp u t
by
o f
be
a s id e .
in
ta s k
o f
s e t
m i l i t a r y
in
to
c o u n tr ie s
(c o m p u te d
o f
can
irm e a s u ra b le s
be
typ e
n a tio n a l
program
le s s
e ffe c tiv e n e s s
th e
m easure
th e
o u tp u t
change
m a t e r i a l .
f o r
o th e r
m ust
e ffe c tiv e n e s s
m ig h t
m i l i t a r y
de
Th is
o f
c om parisons
b u t
t h a t
d o l l a r .
am ount
o r
m e r it
m easure
p e r
m ore
assess
An o th e r
( e .g .,
a
s p e c i fi c a t i o n s ,
in d e x
p r ic e
"bang
o f
o f
d e fe n s e
and
(s p r a y ,
c a lle d
am ount
m easure
o f
is
p h ys ic a l
y e a r -t o -y e a r
to
d e fo l i a t i o n
la b o r
purchased
m a te r ia l
ta s k
o r
f a c t o r ,
o f
(a )
e f f o r t s
p r ic e
c h an gin g
s p e c i fi c
in d e xe s — b oth
v ic e
th e
a
fe a s i b l e .
c o n s is ts
p erson n el
a d ju s tm e n t
i s
p o s s i b i l i t i e s
c on c e p tu al
f u t u r e ,
o f :
how
m easure
u s e fu l
g r e a t
c o n tr ib u te s
t h i s
va lu e -a d d e d
i n t e r e s t ,
ac c o m p lish
and
no
n ear
p r e c is e
i t ,o r
has
purchased
g ive n
on
and
s e c u r i t y
d e fe n s e
n a t i o n s ,
te c h n iq u e )
th e
n e ve r th e le s s
m easure
w hic h
t h a t
a
agreem en t
because
m easure
how
r e l a t i v e
o th e r
f e a s i b l e ,
o f
so
p r a c tic a l
m an ageable.
in
n a tio n a l
s p e c ifie d
tim e )
how
A l s o ,
is
o f
o f
m e asu re ,
q u a n t i fi c a t i o n
th e
th e r e
and
d evelop m en t
assessm en t
as
th o se
p r ic e
am ount
o ve r
s e c u r i t y ,
to
o f
c l e a r l y
an
num ber
a tta in m e n t
o f
r e q u ir e s
s e c u r i t y ,
cause
o f
v a r i e t y
te rm in e s
and
m easures— th e
o f
o f
s e r vic e s
s e r
typ e
c o n s id e r a b ly
s e c u r i t y
p er
d o l l a r .
270
P r o d u c t i v i t y
m easures
th e m se lve s)
J i s .a b 1 e
t h i s
n eeded ,
p o i n t .
Th e
d i r e c t i o n ;
D OD
g e n e r a lly
D OD
—h e
—
a
A
s e t
m easure
o f
o f
d e fl a t i o n
D OD
and
fo r
num erous
th e
th e
th e
item s
purchased
by
th e
anc e)
f o r
th e
c o m b in atio n s
c om m odity
to
a
v a r i e t y
va r io u s
e x tr a
s tr u c tu r a l
I t
th e
fu tu r e
n e v e r th e le s s ,
th in k in g
o f
c o u ld
num ber
th e
c o s t
Sta n d a rd
i s
n o t
in d e x
to
fo r m u la tio n s
in d e x
s e ttin g
up
a d j u s t
fe a s i b l e
and
u s e fu l
p r ic in g
o f
e xp e r ie n c e .
w ould
be
show ,
s e r vic e
h i s t o r i c a l
p r ic e
va r yin g
c o n tr ib u te
to
p ro g ram ,
a ls o
fo rm s
w ould
and
ru n n in g
f o r
fo r
o f
a s s u r
g o a ls .
way
f o r
be
fo r
change
D OD
a
t o t a l
and
On c e
t h a t
va r io u s
e xam p le ,
c o n s tru c te d
w ould
u s e fu l
degrees
such
In d exes
to
and
ta b u l a t e d ).
c ou ld
in
purposes
o f
n o t
th a t
(w ith
in
o u tp u t
used
a
l a r g e l y
D OD
o r g a n i ze d
a c t i v i t y .
o f
on
b ran c h
o b ta i n e d --b y
and
both
be
to
by
a c c o rd in g
fe a s i b l e .
r e q u ir e
th e
o r
Th e s e
m inim al
b a s ic
program .
Gu i d e s
p o s s ib le
m akers
p erson al
th o se
o r
be
be
can
p ric e s
e f f o r t
p r ic in g
th e y
to
d evelop ed
p h ys ic a l
f o r
in d e xe s
by
a b i l i t y
be
c o m b in atio n s
beyond
So m e
2 .
o f
in d e x
Th e
a d ju s te d
can
d e fin in g
d e velop ed
s e r v ic e s ,
o r
d a ta
o b l i g a t i o n
o f
e f f o r t
q u a l i t y
in d e xe s
g r o u p ,
and
been
p r e s e n tly
to
a d d itio n
g o ve r n m e n t-w id e
b e fo r e
based
be
b u d g e t.
m i l i t a r y ,
u n d e r lyin g
o f
can
a
(i n
v e t
u s e fu l
a re
c h an g e ,
n o t
in
becom e
a p p r o p r ia tio n s ,
p ro d u c ts
d e ve lo p e d ,
in
app ear
in d e xe s
o f
in
h ave
m ethods
does
p r ic e
groups
changes
in g r e d ie n ts
done
th e m se lves
d e fe n s e
va r io u s
be
to
and
t h a t
p r ic e
th e se
to
them
d a ta
p u rc hase
o f
and
needs
(w h ic h
in d ex
p r in c ip a l
p a r t i c i p a t i n g
a d a p tin g
r e l i a b l e
f o r
is
much
p ric e s
typ e
o f
D OD
im p ro vin g
purc hase
th e
h o w e ve r,
b u t
e n d -p r o d u c ts ,
a r e
o f
and
perhaps
D OD
purc hase
p r ic e s
added
th e
e xp e rie n c e
e xp e rie n c e d
in
th e
to
f i e l d
n o t
o f
d e s ir a b le
w ith
r e vie w
p r ic e
to
t i e
r i g i d
o f
and
th e
th e
hands
r u l e s ;
c o n c e p tu al
p r o d u c t i v i t y
271
m easurem ent,
as
d e a vo rin g
d e ve lo p
fi n i n g
and
tr e a te d
or
to
w e ll
then
u n der
th e
sh ou ld
p o in t
be
th e
r e s u l t
a
in
p r ic e
lead
to
in c re a s e
fu r t h e r
in
e v e n t,
item s
and
"q u oted
w ith
has
th e
g u ided
fo r
o i l
s i d e r a t i o n s ,
q u a l i t y
how
a ls o
o r
d e s ir a b le
m o tiva te d
and
a
n o t
o r
from
s o c ia l
to
a
d e fe n s e
g o a l.
be
m i s s i l e s ,
q u a l i t y
in
c h an g e,
p ro d u c t
c o n s tr u c tio n )
fro m
e xam p le ,
c ou ld
(s e e
Th is
d e vic e
th e
how
much
t h i s
Ch ap te r
d e c is io n
be
i t
o f
as
w ould
i f
appears
sam ple
P OP 's
I I I )
tr e a te d
o r
to
a
sep
t h a t ,
p ric e d
b e n e fi t )
t h i s
p r i n c i p l e .
to
change
im p rovem en t,
i n te r n a tio n a l
th e
vo lu n te e r
n o n m ilita r y
a re
c h an g e s,
changes
(e x tr a
q u a l i t y
v i e w p o i n t,
So m e
s p e c ific
change
a c c o rd in g
d ip lo m a tic
h ave
broad
o r
e n viro n m e n ta l
w hich
f o r
d e
in c r e a s e .
c o n c e rn in g
p e rfo rm a n c e ,
a
a
fro m
q u a l i t y
change
en
f i r s t
w i l l
as
change
c o n s is te n c y
p r ic e
o r
fo r
c o u r s e ,
such
exc lu d e d
th e
c o n tr ib u te
o f
o r
a
im provem en t.
d eterm in ed
by
o f
p r ic e -in d e x
sh ou ld
o f
o f
d a ta .
s p e c i fi c a t i o n ,
m a in ta in
as
fu e l
th e
d e vic e
su g g e s tio n s
in
p r ic in g
a n ti-s m o g
p r ic e
d e c is io n
e xam p le ,
th e
be
w h eth er
c o n s titu te
r e p o r t — changes
e n t i a l s
in
o f
f o r
Fo r
to
tr e a te d
c h an g e,
m is s io n .
Ho w
w ould
problem
i t s
q u a l i t y
o rd e r
item
q u e s tio n s
p r i n c i p l e
th e
th e
p r ic e "
exam ined
In
i m p l i c i t l y
Many
a
o f
w isdom
any
w ith
o f
th e
t h a t
u s e fu ln e s s
purpose
c o s t
n o t
o f
r e ve a ls
p erson n el
va r y
th e
q u e s tio n :
purchased?
f o r
m ay
th a t
th e
th e
and
a r a t e l y
t h i s
is
so
q u a l i t y
a c c o m p lish in g
tr e a t i n g
a
fo r
assessm ent
( fo r
in
g u id e lin e s
m ethods
p r i n c i p l e
vie w
l i t e r a t u r e ,
p r in c ip le s
f o r
ju d g ed
o f
broad
sam e
Ac c o r d in g ly ,
g u id in g
a v a i l a b l e
a d ju s tin g
s h ip s — though
th e
as
a re
Th e
th ro u g h o u t
p r ic e
d i f f e r
p o l i t i c a l
arm y.
p u rp o s e ,
c o u r s e ,
c on
In c re a s e s
no
m a tte r
r e j e c te d — u n le ss
o f
in
h ave
th e y
m ixed
272
a t t r i b u t e s ,
tir e m e n t
pay
An
o th e r
GAO
o f
r e p o r t ,
in
vie w
and
in
com plex
Co n s u m e r
o f
U .S .
I t
m ay
ite m s ,
b u t
Na tio n a l
by
com e
1t
p r o d u c t i v i t y
S e c u r i t y
p er
c h an ge.
u n i t
m ent
in
c a p a b i l i t y
t h i s
re a s o n in g
3 .
is
o f
o f
m ovem en ts
f o r
s i m i l a r l y
c o n s tru c te d
w ould
in d ic a te
i e n t
n o t
a c t i v i t y ,
sh ou ld
1/
p r o vid e
a lth o u g h
c lu e s .
Fe a s i b i l i t y
o f
th e
Co m p tr o lle r
w i l l
as
by
th e
is
how
n e a re r
On e
much
in p u t
is
a
th e
f o r
som e
in
ve r y
p r ic e
to
a d ju s te d
Na tio n a l
by
th e
s p e c u la te
c o n tr ib u te s
in
u n a tta in a b le
r e l a t i v e l y ,
o n ly
In
p rem atu re
p u rc h ase
in c re a s e
can
in
a v a i l a b l e
r e l a t i v e — p r ic e
any
Th e
r e s o r t .
m i l i t a r y
n e g a te d ,
c o u n tr ie s .
t h i s
o f
r e
th e
in d e xe s .
s k i l l s
f i r s t
p r o xy
t h a t
in p u t
n e c e ssary
a
a t
p e s s im is tic .
and
be
is
s u p p lie r s '
seem s
recom m ended
q u ic k ly
im p rove
how
much
c o m fo r t.
Li m i t a t i o n s
be
d esig n ed
to
show ,
I t
be
u s e fu l
w ould
s e r ie s
o ve rru n s
w ith
f o r
o r
o th e r
Bud get
Ec o n o m i c
Ge n e r a l
o th e r
are as
Pr ic e
o f
w ould
In d e xe s
Co m m itte e ,
o f
th e
h i s t o r i c a l l y ,
f o r
e i t h e r
and
be
By
w ith
i t s e l f
w a s te fu l
o r
p r ic e
i t
e f f i c
a n a ly s is
th e
in d exes
f a c i l i t a t e d
b u t
n o t
d e -
S y s t e m s ,"
Re -
f o r
Co n g re s s
Un ite d
th e
c om parison
c o u n tr ie s .
in fo r m a tio n
p la n n in g
Co n s tr u c tin g
Po r i h t o r t h e .
by
i t
so u g h t
reason
p u rc h ase s.
c o s t
be
w ould
and
o r
r e s o u r c e s ,
approac h
th e
is
o th e r
tim e
D OD
g e n e r a l l y ,
n o t
Th e
w ould
in d e xe s ,
d a t a ,
th an
and
o f
o f
o u t.
Offi c e ^ /
d evelop m en t
m easurem ent
r e a l i s t i c
in d e x
D OD
o f
in p u t
Ad va n ta g e s
Th e
o u tp u t
d e fl a t i o n
ru le d
u n n e c e s s a r ily
seem s,
m easure
a ls o
app ears
t h i s
to
is
i t
sh ou ld
1t
In d e x
recom m ends
t h a t
i m p l i c a t i o n ,
Ac c o u n tin g
Go v e r n m e n t
c lo s e r
S e c u r ity
Pr ic e
By
Ge n e r a l
w e a lth
be
arm y.
th e
s u p p lie r s '
untapped
m ig h t
by
sp e c tru m ;
P a r a d o x i c a l l y ,
in d e x
vo lu n te e r
e s se n c e ,
th e
fa l l b a c k .
th e
th e
in
th e
th e
p rop o sal
l i e u
o f
D OD
b y
in d e x
end
dexes
e .g .,
W eapons
o f
S t a t e s ,
th e
A p r i l
Un ite d
19 72 .
Sta te s
273
te rm in e d .
o r
Fo r
d ec reases
p r ic e
dex
e xam p le ,
a r i s i n g
fo r e c a s te r s
w ould
show
w h at
d o l l a r )
p u ts
b eh aved .
th e
o r
e xp e n d itu r e
th e
fro m
w ould
(c o n s ta n t
h ave
c i t i ze n s
th e
In d e x
s p e c ia l
w an t
changes
d a ta
in
n e t
p r ic e
u s e fu l
in
a re
g e ttin g
o f
abnorm al
a
t h e i r
o f
take n
Budget
o f f i c e r s
w o rth
in
Th e
i n
th e
d e fla te d
o f
how
re a l
n o t
e f f o r t
o r
and
m easure
w ould
d e fe n s e
in c re a s e s
c h an ges.
p la c e ,
fig u r e s
m o n e y 's
p r ic e
u n iq u e
q u a n t i t y
d o l l a r
term s
th e se
h ave
p r o vid e
c o n s ta n t
w as
show
c irc u m s ta n c e s .
d ata
w ould
Th e
w ould
show
w h e th e r
w h e th e r
term s
o f
i n
th e
D OD
n a tio n a l
s e c u r i t y .
As
an
e s c a la tio n
w ould
be
to
be
e xe rc is e d
in
an
i n d e x ,
o th e r
lim ite d
in d e x
th e
t l e
fo rm
I t
a re
A
Lo o k
A
sum m ary
a t
a c tio n s
o u tlin e d
in
i e t y
o f
a
c o n tr a c ts
w ith o u t
s p i r a l ,
r e s u l t s
in
p u rp o se .
w hereby
a
th e
a
c o n tr a c t
use
Care
p r ic e
p r ic e
o f
th e
w ould
in d e x
in d e x
need
i s
used
in c re a s e
and
an
fo r
in d e xe s .
in te n d e d ,
n o t
a
p r o vid e
h i s t o r y
t h a t
th e
change
p u b lic
i s
Re s o u r c e
th e
in d e x
in fo r m a tio n
a llo w
o f
th e
in
use
a p p r o p r ia te
in
Na tio n a l
segm ents
Ac c o u n ts
c o n c e p t
t o
v a lu e -a d d e d
in fo r m a tio n
in
a
f i e l d
p r i c
w here
l i t
a v a i l a b l e .
and
k in d s
c o u ld
f o r
o r
be
s e c tio n
Data
o f
A v a i l a b i l i t y
b a s ic
take n
on
to
d ata
a v a i l a b l e
proc ess
th e
i s
d a ta
d e s c rib e d
i n t o
u s a b le
Re c o m m e n d a tio n s ,
W eights
Th e
d ata
tu r n
w ould
p r ic e
a .
b u d g et
c r e a te
c o n tr ib u te
w ou ld
I t
h i s t o r i c a l
Th e
d e fe n s e
a lto g e th e r
p r i m a r i l y
w ould
h o w ever.
b e lo w .
to
in
n o t
in d e x
4 .
n o t
f o r
r i s e .
e s tim a te s .
i n g ,
n o t
w hich
Alth o u g h
o f
b u t
d e vic e
each
DOD
y e a r
B a c k -u p
is
in
can
an
e s p e c ia lly
p r o vid e
w o rk sh e e ts
a
fo r tu n a te
b a s ic
h ave
been
fra m e w o rk
used
to
p o s i t i o n
f o r
a
p re p a re
in
w id e
t h a t
v a r
c u r r e n t l y
*
274
a v a i l a b l e
and
can
in d e xe s
be
( e .g .,
adapted
b .
to
sam ples
o f
w o rk s h e e ts ;
a t
even
DSA
o r
d a ta
to
th e
as
le v e ls
f i l e s .
p erson n el
as
t i f i c
th e
to
a
F i r s t ,
can
te c h n iq u e s
can
is
view ed
h o s t
w r i t t e n
ie n c e .
A
than
in
f i f t y
th e s e
Gr o u p s
o f
in c lu d e :
and
o f
and
in
and
sam ple
th e
Co n tr a c t
Ar m y
Bu d g e t)
r a te
d e t a i l
th e
a v a i l a b l e
can
be
fro m
d ata
draw
fro m
o r g a n i ze d
in fo r m a tio n
sh o u ld
in
p ro vid e
nonhom ogeneous
f o r
fo r
ite m s ,
tr a n s p o r ta tio n
o f
and
p e rs o n s ,
s a l a r i e s .
can
t r i e d ,
w here
is
ite m s"
Aw a r d s
d a ta
in te r p o s e
u s e d ,
fra m e w o rk
s e le c tio n
f o r
sh ou ld
be
broad
" s h e l f
c i v i l i a n
be
th e
Fi n e r
fra m e w o rk
no
and
stu m b lin g
b lo c k .
sam plin g
judgm en t
Sc ie n
based
on
n e c e s s a ry,
a re
i t s e l f
p re s e n ts
d e t a i l
th e
p ro d u c ts
s i m i l a r
Co n s u m e r
p e rc e n t
areas
f o r
and
h i s t o r i c a l
m eth od olog y
In d e x
19 73
Pr ic in g
c a tio n s
Pr ic e
in
p r o vid e
m i l i t a r y
fram ew o rk
a
FY
needs,
p ro vid e
Pr im e
sam plin g
Pr ic in g
problem
d e t a i l
M i l i t a r y
on
c .
th e
In d i c e s ,
s e r v ic e s .
a s s i s t
m e th od olog y
sam plin g
b u d g et
o f
va lu e s
and
o f
o ffi c e s
d ata
Sa m p lin g
b u d get
va lu e s
e s ta b lis h
w e ll
v a r i e t y
p ro d u c ts
and
f i n e r
6 SA
a
Pr ic e
Sa m p lin g
Th e
in g
M i l i t a r y
o f
th e
s e r vic e s
th a t
Pr ic e
In d e x
D OD
b u d g e t.
som etim es
m i l i t a r y
p ro d u c ts
m i l i t a r y
and
s e r ie s
can
c i v i l i a n
be
can
p erson n el
be
i d e n t i f i e d ,
e s ta b lis h e d
in
th e
fo llo w e d
Pr o b l e m s
s e r vic e s
c h a lle n g e ,
b u t
as
im p ro ve s.
em ployed
c h a lle n g in g
and
g r e a te s t
p ro s p e c t
p r ic e
to
th e
b u t
t h a t
o f
B LS
to
D OD
e xp e r
W h olesale
re p r e s e n t
q u a l i t y
r a r e l y
f a l l
fro m
s p e c i fi
m ore
a d ju s tm e n t
in s u rm o u n ta b le .
i n t o
(in c lu d in g
t h i s
m i l i t a r y
c a te g o ry
r e t i r e -
2 75
m e rit),
tr a n s p o r ta tio n
m a t e r i a l s ,
Th e
in
th e
and
r e n t ,
f o r
n i f i c a n t
m ig h t
in
th e
be
a u to m o b ile s
A i r c r a f t ,
item s
t h a t
f a r
th e r e
i s
in
s i b l e
to
(a t
any
s h ip s )
th e
p u ts
D OD
p r ic e
and
change
th e
U .S .
p r ic in g
Fo r
f o r
c o n ta in s
and
m ore
r e a l
in c lu d e d
lan d
s a t i s f a c t o r i l y
B u r e a u 's
r e p r e s e n t
s i g
s e r vic e s
is
r e p a i r
i s ,
item s
o f
t h a t
a
s e r v i c e ,
c o u r s e ,
can
d i f f i c u l t y
a n o th e r
m a tte r .
o f
is
e xp e rie n c e
In d ic a tio n s
typ e s
tim e ,
i t
o f
w o rk in g
th e
be
th a n
c i v i l
b id
s h ip s
done
n e c e ssary
s u b c o n tra c to rs
p r ic in g
b ein g
i f
to
a l l
an
in
r e s o r t
e ls e
o f
i t
w ould
t h a t
in d e x
f o r
to
pos
been
o f f i c e r s
be
n o te
t e s t
be
h ave
m ig h t
th e
th e se
to
d e ve lo p in g
c o n tr a c t
fi n i s h e d
is
in
a i r c r a f t
w ith
Pr ic in g
en c o u rag in g
t h a t
has
be
s h ip s
a re
Ad m in is tr a tio n
m ay
as
Eq u i p m e n t
M a ritim e
and
in
to
d e velop ed
c i v i l i a n
Dep artm en t
o f
p r ic in g
o r
i n
n o t
s u i t
f a i l s ,
P r o d u c t i v i t y
Th is
a b le
'O t h e r
Fo r
i t
been
such
a re
e q u ip m e n t,
Ce n s u s
o r d e r s .
m is s ile s
c o n tr a c to r s
d .
o f
p r i c e ,
b u ild in g s
Ne v e r th e le s s ,
s e ve ra l
c o n s id e r a b le
th e
w h ic h ,
no
a re
background
and
a
w ith
r o u t i n e .
i d e n t i f y
f o r
o f
to
n o t
e m u la te d .
p r ic e d .
m i s s ile s
som e
s u p p lie s
exam ple.
a i r c r a f t .
r a te
o f
fro m
fo r
and
m ajo r
Na vy.
and
a lth o u g h
c a te g o ry
e f f o r t ,
t r u c k s ,
be
and
has
a p artm e n t
p a r ts
sh ip s
p r o d u c tio n
e va lu a te
som e
s h ip s
be
fo r
w e ll
t h i s
t h i n g s ,
s e r v i c e s ,"
p r ic in g
and
some
though
o r
w i l l
in d e xe s
m ig h t
d i f f i c u l t
" o th e r
econom y,
s t a n d a r d i ze d
w ith
a re
s tr u c tu r e s
g r o u p ,
even
a l b e i t
w hich
h ou sin g
o f
u t i l i t i e s .
g r o u p s ,
c i v i l i a n
and
a s s o rte d
p ro b le m ,
p r i c e d ,
and
r e s i d e n t i a l
r e a d i l y
m ain
La n d
tr a n s p o r ta tio n
and
ite m s ,
s e r vic e s
e xc e p tio n s
v a r i o u s l y
ia n
and
s tr u c tu r e s .
ac c om plish ed
p e rs o n s ,
c om m un ic ation
nonhom ogeneous
p ro d u c t
in d e xe s
o f
a d j u s tin g
was
in p u t
d isc u s se d
p r i c i n g .
a b o ve .
Th e
d a ta
a re
y e t
276
e .
g o in g
and
back
Re s o u r c e s
Th e r e
is
a
s p o ra d ic
to
W orld
War
a n a l y zi n g
p r ic e
m easu res.
t a i l e d
and
Oth e r
know ledge
o f
c o s t-c h a n g e s
va lu a b le
B.
in
an y
I I ,
as
p h ys ic a l
r e s u l t i n g
in d e x
w e ll
as
A l s o ,
o f
s t a f f
e f f o r t
p r ic e
e xp e rie n c e
o n -s i t e
c o n tr a c t
c h a r a c t e r i s t i c s
from
D OD
and
c h a n g e -o r d e r s .
m easurem ent
in
c o n s tr u c tin g
a u d ito r s
p e rfo rm an c e
Th e s e
s k i l l s
o f
h ave
de
p ro d u c ts
sh ou ld
be
u n d e rta k e n .
Re c o m m e n d a t i o n s
So m e
f o r t h
in
recom m endations
th e
body
o f
flo w
th e
from
fro m
s tu d ie s
w ork
m ig h t
be
o r g a n i ze d
how
e f f o r t
p ro vid e
encouragem ent
p r ic in g
poses
m i l i t a r y
in
m ind
1•
ge n e ral
t h i s
b a s ic
c o n c e p t,
r e p o r t
and
Pr ic e s
sh ou ld
s e r ie s
c o n s tru c te d
A
De fe n s e ,
be
to
in d e xe s ,
c lim a te
o f
o f
typ e
f o r
and
be
o th e r
to
on
in
th e
l a s t
hope
t h a t
recom m endations
a re
Pu r c h a s e
is
th a t
fe a s i b l e ,
D OD 's
own
Pr ic e
a
be
a re
is
in
an
com m itm ent
w ith
to
th e se
p u r
in d e x
o f
o ffe r e d :
In d e x
p r ic e
in
d e t a i l
d evelop ed
e xp e rie n c e
s e t
Oth e r
in c lu d e d
some
purc hase
d e s c rib e d
c o n c lu s io n s
e a r l i e r .
and
I t
a
and
m ade
m ade.
on
be
s t r u c t u r e ,
from
and
and
elsew h ere
c o n s tr u c te d .
n o t
fro m
p ro xy
p u rp o se s.
Pr ic in g
by
p r i n c i p l e
m o tiva tio n
a t
W ork
to
d e r ive d
based
w i l l
r e c om m endation
com m itm ent
th e
and
fo llo w i n g
fou n d
Co m m itm e n t
2 .
p r ic e
th e
Co m m e n c e m e n t
Th e
th e
th e
p urc hases
t h a t
o b s e r va tio n s
and
su g g e st
to
th e
r e p o r t
p ro p o s a ls
I I I
h i s t o r y
th e
o f
g o ve rn m e n t,
d evelop m en t
m i l i t a r y
n e c e ssary
p r ic in g
to
e s p e c i a l l y
and
m ain tenanc e
e xp e r ie n c e ,
c o n s tr u c t
th e
th e
Dep artm en t
o f
w ould
in d e x.
o f
r e l i a b l e
p r o vid e
th e
27 7
O f f i c e
3 .
Th e
c o u ld
do
o f
e s ta b lis h m e n t
m uch,
i f
g ive n
sam plin g
p ro c e d u re s ,
m e th o d s,
fo rm s
fo r m i ty
o f
th e
Th e
s k i l l
fo r e
fo r
done
on
perm anent
an
ad
hoc
In
o rd e r
in
th e
m easures
in
d i s t i n c t
fro m
v i c e .
Su c h
p la n n in g
group
a g e n c ie s"
o th e r
governm ental
m i l i t a r y
b u t
b u t
a t
a
th e
o r
c o n c e p t
n o t
w ould
r e l i e v e
o r
La s p e y r e s
o th e r
k e y.
o th e r
m easurem ent
in te r -a g e n c y
w ould
lo w e r
o f
an
Fo r m u l a t i o n
w ith
o f
r e p o r tin g
D OD 's
th a t
w ork
in
w ould
th a t
and
u n i
program
d i v e r s i t y
a s s u re
a t t e n t i o n
s k i l l s
p r ic e
In d e x
Ex p e r i m e n t a t i o n
proc eed
o f
ag en c ies
th e
r e c e ive s
o f
e s ta b lis h
optim um
m easurem ent
th e
w ould
w ith
D OD
o f
be
e f f o r t
w o r k ,
becom es
t o
h e r e to
p a r t
o f
th e
De p a rtm e n t.
Ef f o r t
e xp e r ie n c e .
Both
b u t
e xp e rie n c e
p r ic in g
5 .
D OD
u t i l i ze
e f f o r t ,
w ith
o r i e n t a t i o n
p r ic e
w i t h i n
e s ta b lis h
e f f o r t
l i a i s o n
f o r
c o u ld
m arshal
f i e l d
"hom e
d ata
s t a f f
p r ic in g
to
c o n c e rte d
s t a f f
w ork
p rogram m in g ,
d e s ir a b le
b a s i s ,
d e f l a t i o n ,
a
a
p r ic in g
c o o r d in a te
e s ta b lis h e d
th ro u g h o u t
In te r -Ag e n c y
e xp e rie n c e
i t
p r ic e
h i s t o r i c a l
4 .
I f
to
assu re
p r o d u c t i v i t y
a v a i l a b l e
perm anent
m achine
o th e rw is e
D OD
a
a u t h o r i t y ,
m easurem ent,
need
a c h ie ve d .
and
and
o f
a rra n g e
s ta n d a r d s .
p r o d u c t i v i t y
w ard
Pr ic in g
o n ly
fo r m s ,
and
e f f o r t
in
a t
sh are
some
o f
th e
in d e x
d e s c rib e d
be
and
a
fo rm s
in
o f
w o rk in g
c on c ern
fe a r
ag e n c ie s
use
w ould
s k i l l s
groups
Pa a s c h e
as
th e
th e
th e
d e te r m in a tio n )
o u ts id e
and
governm ent
o f
id e as
w i t h i n
b i a s ,
i f
sh ou ld
Ch ap te r
I I ,
w ith
th e se
l e v e l
(as
g r e a t
s e r
fro m
D OD
t h a t
D OD
be
t h e i r
uses
u se d .
sh ou ld
278
C l a s s i fi c a t i o n
6*
A
sh ou ld
be
used
m ovem en ts
p r ic e
o f
f o r
sh ou ld
v a lu e s ,
a n d ,
th e
Fe d e r a l
e xte n t
can
o f
p o s s i b l e ,
im p u ta tio n
to
o f
u n p ric e d
then
be
used
s tr u c tu r e
p r ic e
ite m s .
to
Th e
c om pile
s t r u c tu r e s .
w e ig h tin g
and
s t r u c t u r e s ,
to
c od in g
th e
a c t i v i t y )
Data
i n s t i t u t e d
s u p p ly
o r
th e
r e c o n c i l i a t i o n
r e l a t e :
u n d e r ly in g
s t r u c t u r e ,
Sta n d a rd
c o n s tr u c tio n
i n
a p p ro
o b l i g a t i o n
c o n tr a c t
In d u s tr i a l
and
o f
aw ards
va lu e
C l a s s i f i c a t i o n .
Pr ic in g
Se ts
s e r vic e s
o f
r e g u la r
s p e c i fi c a t i o n s ,
s e le c te d
c h a r a c t e r i s t i c s ,
s e t
Va lu e
v a r i e t y
be
and
s e r vic e s
m anner
s a m p lin g ,
a
program
c l a s s i fi c a t i o n
f a c i l i t a t e
p ro d u c t
be
o f
th is
o r
To
c od in g
Th e n
in
a
_ sam pling
o f
p r i a t e
and
o f
Re c o n c ile m e n t
re p r e s e n tin g
8 .
th an
com m odities
v a r i e t y
d e xe s ,
to
Str u c tu r e
(r a th e r
purposes
d e velop ed
a
7.
fo r
sam pled
s e r ie s
in d exes
com m odity
and
in
sh o u ld
p r ic e
th e
be
d e s c r ib in g
sam p le,
d evelop ed
r e p o r tin g
and
to g e th e r
to
th e
in
d e t a i l
w ith
t h e i r
f u l l e s t
ta b u la tin g
and
th e
p ro d u c ts
p r ic e -d e te r m in in g
e x te n t
p ro c e ss in g
p o s s ib le .
system s
sh ou ld
u p .
9-
Sp e c ia l
Measurem ent
Sp e c ia l
p r ic in g
in
s e r vic e
a re as
a t t e n t i o n
problem a r e a s .
w here
s p e c ia l
Te c h n iq u e s
sh ou ld
Th e
body
and
be
g ive n
o f
th e
a t t e n t i o n
is
M ethods
to
t e s tin g
r e p o r t
d e s ir a b le .
l i s t s
Th e
ande xp e r im e n ta l
many
m ost
p ro d u c t
and
im p o rta n t
a r e :
a .
A i r c r a f t
A
i n s t i t u t e d .
v a r i e t y
Sim u la te d
b id s
o f
on
typ e s
sh o u ld
p r o to typ e s
be
s e le c te d
sh o u ld
be
and
t r i e d ,
t e s t
p r ic in g
fo llo w i n g
and
279
e va lu a tin g
As
a
s t a r t i n g
A r m y 's
su re
o f
c h a n g e -o r d e r s
p o i n t ,
r e c e n t
w ork
d e fin e d
use
o f
sh o u ld
as
a
h edon ic
be
d e ve lo p in g
q u a n t i t y
q u a lity -c h a n g e
m ade
o f
th e
p r ic e s
o f
fi n i s h e d
c o m b in atio n
o f
p o s s ib le
expand
U .S .
w e ig h t
m easures
t r i e d .
De p artm e n t
o f
a i r c r a f t .
Th is
m ear
each
typ e
and
speed
f o r
th e
m ethod
th e
a ir p la n e .
b .
Sh ip s
I t
U .S .
De p a rtm e n t
s e l s .
o f
Pr o to ty p e
m ay
th e
o n e -fa m ily
m ents
w ith
Ro a d s
in d e x
in p u t"
th e
c o s t
a d ju s tm e n t
re p la c e d
m easuring
an
and
th e
re q u ire m e n ts
f o r
change
f o r
used
by
fi n i s h e d
th e
ve s
t r i e d .
t h e i r
and
a ffo r d
s a la r y
a l t e r n a t i v e
to
a
in
e xp an sio n
o f
o f
m easuring
th e
f o r
new
be
t r i e d ;
Bureau
o f
a
Bureau
e x p e r i
o f
Pu b lic
"m o d ifie d
m a te r ia ls
s e r vin g
a
te s te d .
th e
La b o r
re s e a rc h
c on d u c ted
S t a t i s t i c s
s t u d y ,
purc hase
p r ic e
change
o u t.
sh ou ld
be
c a r r ie d
c h a r a c t e r i s t i c s
o f
R& D
to
t e s t
c h an g e ,
be
Ce n su s
De ve lo p m e n t
u n iq u e
u sin g
as
th e
p r a c t i c a l i t y
a c c o u n t
c o n tr a c to r s
p a r t i c u l a r
th e
by
sh ou ld
m a te r ia ls — sh o u ld
and
o f
p la c e ,
and
to
d e ve lo p e d
b u ild in g s
in
Fo u n d a t i o n - B u r e a u
f e a s i b i l i t y
la b o r a to r ie s
a p a rtm e n t
Re s e a rc h
Sc ie n c e
A l s o ,
be
on
p r ic e
te c h n iq u e
c o n d u c te d ;
Re vi e w
th e
a ls o
com ponents
be
to
d .
d ic a te d
m easuring
sh o u ld
and
o f
sh o u ld
s i m ila r
Na tio n a l
in
r e g r e s s io n
houses
in d e x— i .e .,
p u rp ose
Na vy
to
Co n s tr u c tio n
Th e
f o r
be
p r ic in g
c .
as
a tte m p te d ,
o p p o r tu n ity
i .e .,
jo b
paym ent
s h e e ts .
fo r
an
w hich
f o r
p r o fe s s io n a l
in
and
i n
Ar m y
p erson n el
a l t e r n a t i v e
e d u c a tio n
th e
m ethod
e xp e rie n c e
280
e .
Pe r s o n n e l
Th is
e r a l .
Du e
to
th e
needs
tim e
c h a n g e -o ve r .
th e
b a s is
a s id e
o f
(a n d
a v a i l a b l e ,
as
is
an
g ive n
to
in c lu d in g
in p u t
is
in
th e r e
p r ic e
th e
t h i s
has
In
an
t h a t
th e
th e
c o u rse
e xc e p t
an
is
assessm ent
b e n e fi t
as
m ean tim e,
to
th e
to
i f
to
be
use
a l l
s tu d y
th e
jo b
c o n s id
a t
th e
on
le a vin g
b e n e fits
o r
sourc es
o f
d e f i n i t i v e
t h a t
gen
m ade
POD,
n e t
t r e a t
e x te n t
in
n e c e ssary
Co r p o r a tio n
be
are a
h o w e ve r,
d e te r m in a tio n
w ould
to
th e
e x tr a
An a ly s is
In
s ys te m ,
argu m en ts
m aking
r e p o r t .
p ru d e n t
in )
problem
a d ju s tm e n t
ac c rued
Re s e a r c h
in c re a s e
s t a t i s t i c a l
vo lu n te e r
w h eth er
e m b ro ile d
th e
th e
o f
a
recom m ended
s o c i e t y .
d e la y e d ,
r e a l l y
to
I t
becom ing
d e s c rib e d
t i o n
be
w h eth e r
j .l s § d v a n t a g e s
a tio n
to
n o t
n o t
i n s t i t u t i o n
e r a tio n
o f
is
e va lu
e va lu a
c h a n g e -o ve r
d u tie s
a re
m o d ifie d .
A
t e s t
to
ac c o u n t
r e c l a s s i fi c a t i o n
to
sh ou ld
be
in d e x ,
recom m ended
ite m ,
be
i .e .,
i t
e s ta b lis h e d
10 *
sh o u ld
th e
be
to
e f f e c t
grades
Th is
be
com pared
sh ou ld
r e tir e m e n t
sh ou ld
n o t
though
be
d e fla te d
p aid
o r
no
w ith
and
change
th e
th e
in
R& D
p o s s ib le
d u tie s
s a la r y
t e s t
to
sh ou ld
be
tr e a te d
s e p a r a te ly
p re s e n t
b u t
an
as
a
c u r r e n t
a c tu a l
va lu e
fr i n g e
sh ou ld
em ployees.
Ad ju s tm e n ts
p h ilo s o p h y ,
ac c om plish m ent
c re e p "
a b o ve .
M i l i t a r y
ju d g e
"upw ard
l i t t l e
Re tire m e n t
as
o f
w ith
M i l i t a r y
Q u a l i t y
Th e
th e
h ig h e r
i n s t i t u t e d .
f -
f o r
changes
o f
th e
under
on
th e
d e fe n s e
th e
c on c e p t
b a s is
o r
o f
o th e r
o f
a
p u rc h ase
w h eth er
m i l i t a r y
th e y
p r ic e
a id
m is s io n .
o r
in d e x ,
i n h i b i t
Ha vin g
281
done
per
t h i s ,
th e
u n i t )
change
o f
th e
change
i t s e l f .
c o n c e p t,
c u rem en t.
any
th e
as
th e
g o a ls .
He n c e ,
to
in
th e
a
and
o m it
th e
m a tte r
s to c k
fu n d s
th e
o f
m i l i t a r y
be
m ay
in p u t
n o t
w ould
m ade
be
th e
in
by
be
th e
p r ic e
th e
p e rfo rm an c e
ig n o re d
p r ic e
un der
s e r i e s .
p o s s ib le
in
som e
areas
c h a n g e -o ve r s
is
a ls o
a
r e s id e n t
c o n tr a c to r s
c o n tr a c t
and
perhaps
(c o s t
t h i s
As
o f
to
p r o
l i k e l i h o o d .
a u d ito r s
sh ou ld
be
s u b c o n tra c to rs
sh o u ld
th e
f o r
be
p r ic e
a
" e x tr a
as
a
p re c lu d e s
d e t e r i o r a t i o n s " ),
purc hase
b e n e fits
p r ic e
recom m ended
s to c k
in
fu n d s
lo n g e r
run
be
o f
o i l
fro m
i f
a t
a
a d ju s tm e n t
u n re la te d
p r ic e s
to
above
m i l i t a r y
g o in g
fo r e ig n
c o u n tr y
r e p o r t ,
f o r
r a te s
sh ou ld
be
in c r e a s e .
th e
a t
th e
body
o f
" r e s a le s "
as
th e
in c e p tio n
c o n s id e r a tio n ,
tr e a te d
D OD
o f
th e
h o w e ve r,
purchases
a t
p r ic e
p r a c tic a l
in d e x
p u r
p r o j e c t .
th e
purchases
th e
tim e
by
th e
a c t u a l l y
m ade
o m itte d .
In d exes
a d d itio n
change
num ber
p r ic e
recom m ended
Fu n d s
Sp e c ia l
a re
o f
th e
p o l i t i c a l
in d e x
sh o u ld
In
th e r e
o f
e xam p le ,
in tr a -a g e n c y
12 .
m easure
f o r
Sto c k
As
As
(o r
a t t a i n
11.
poses
w ould
n e g a tive )
change
p r in c ip a l
p h ilo s o p h y
b e n e fits "
o rd e r
q u a l i t y
by
r e q u ir e d .
" e x tr a
tr e a te d
s k i l l s
m easured
o r
m easure
th e
As s is ta n c e
Ag a in ,
in
h edonic
o f
be
(p o s i t i v e
a d ju s tm e n t
Co s tin g
u t i l i ze d .
sh ou ld
c o s t? -le s s
no
th e
e v e n t,
so u g h t
A
i .e .,
m e th o d o lo g y,
In
a d ju stm e n t
o f
to
and
in d exes
c o n s ta n t-p r ic e
s p e c ia l
s i t u a t i o n .
re q u ire d
in d exes
Th e s e
va lu e s
w hich
s p e c ia l
to
m eet
o f
th e
broad
d e fe n s e
g o a l ,
to
p u rc h a s e s ,
m ig h t
add
i n s i g h t
i n t o
m easures
a re
recom m ended
th e
282
p a r t i c u l a r l y
c o n tr a c to r s
p u t
p r ic e
w ould
be
y a r d .
and
In
D OD .
and
in
c o s ts
n o t
in
Th e s e
a c t i v i t i e s
by
c on c ept
th e
th e
th o se
p a r t l y
in d e x
in d e x ,
l a t t e r
com ponents
in d e xe s ,
D OD
f o r
o f
o f
th e
p r ic e
o f
a
n o t
th e
c a s e ,
th e
in p u ts
s h ip s .
th e
com parison
Sh ip s
2 .
Re p a ir s
o f
3 .
M edic al
c are
4 .
U t i l i t i e s
Fo r
o v e r a ll
to
th e
5 .
Tr a n s p o r ta tio n
to
o f
fo r
a
D OD
re a s o n ,
in d e x ,
w ould
sam e
a c t i v i t y
c om m unication
in
s h ip
a re
p a r t l y
exam p le .
b u i l t
t h i s
equipm ent
and
p e rfo rm e d
s h ip
p r ic e
a re :
1.
a re
D OD --s h ip b u ild in g ,
b u t
th e
p a r t
th a t
a
under
Un d e r
in
a
to
p r i v a t e
i n
govern m en t
in -h o u s e
add
th e
ya rd
m a t e r i a l s ,
s p e c ia l
se rve
p r iv a te
p r iv a te
b u i l t
th e
by
l i g h t
la b o r
p r ic e
on
c o n tr a c t
to
283
1/
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a
t h *
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"A
Stu d y
Pa p e r
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o f
in
9,
th e
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V a l i d i t y :
Th e
Pr ic e
Pr ic e
Ec o n n m i ^
B LS
W h olesale
S t a t i s t i c s
S t a t i s t i c s
Re s e a r c h
to
o f
Re vi e w
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75 .
76 .
77.
Pe rs o n s ,
W arren
Ho u g h to n
M i f f l i n
Ro b e rt
P o l i a k ,
" So m e
" P o l l u t i o n
Jo e l ,
o f
Pr ic e s
and
S t a t i s t i c s ,
19 70 ,
Q u i n n ,J .L .,
"A
" Th e
RAC
o f
RAC-M VA
Su rve ys
Im p ac t
Fe b r u a r y
Su rve y
th e
th e
o f
Nu m b e rs ,
Ne w
Yo r k ;
C P I ,"
U n i v e r s i t y
Co n s u m e r
U .S .,
Pr ic e
Bureau
o f
I n d e x ,"
o f
La b o r
S LT R
and
Te c h n iq u e s
2 - 7 1,
Ev a l u a t i o n
o f
I ,
" Ph a s e
I I
Data
B a s e ,"
No ve m b e r
th e
o f
Fo r c e
A i r
I ,
In s t i t u t e
and
Vo lu n te e r
19 73 ;
V o l .
V o l .
A r m y ,"
R A C - T P - 19 0 ,
Modern
March
19 72 ;
19 72 ;
Vo lu n te e r
M eth od olog y
th e
R e p o r t ,"
No ve m b e r
Modern
C o r p o r a tio n ,
V o l .
M ethods
19 71.
R e s p o n s e s ,"
An a ly s is
th e
A c t i v i t i e s ,"
V o l .
to
A n a l y s i s ;
in
and
C o r p o r a tio n ,
Vo lu n te e r
Re la tin g
Re s e a r c h
R& D
Pr o g r a m ,
A l l
In d e x
u n p u b lis h e d .
An a ly s is
(M VA)
o f
C o n d itio n s ,
C a t e g o r i za t i o n
Te c h n o lo g y ,
Re s e a r c h
Co sts
Li v i n g
In d u s tr ia l
Ar m y
Co n s tr u c tio n
Pr o b l e m s
Po p k in ,
o f
8 0 .
A .,
Th e
19 2 8 .
u n p u b lis h e d .
M easuring
79 .
C o .,
Pe n n s y lva n ia ,
Offi c e
78 .
M i l t o n ,
"M e th od olog y
o f
I I ,
" An a ly s is
"Stu d ie s
I V ,
No ve m b e r
Su m m a r y
V o l .
I l l ,
and
19 72 .
fo r
In d u s tr y
R e s u l t s ,"
March
19 6 6 .
8 1.
Re e s ,
P .M .
and
Ex p e n d i t u r e :
B r i t i s h
8 2 .
R ie c h e l,
Klaus
Au g u s t
2 7,
Ro ys e ,
Jo h n
O f f i c e
o f
U .S .
8 4 .
8 5 .
A .,
o f
A l l a n
A .,
D .»
Am e r ic a n
A l l a n
and
M o n th ly
A l l a n
D .,
La b o r
Re vie w ,
S e a r l e ,
A l l a n
D .,
19 6 6 ,
th e
Pr ic e
in
Pu b lic
De ve lo p m e n t
S e c t o r ,"
a
D r a ft
De ve lo p m e n t,
" So m e
Offi c e
S t a t i s t i c s ,
o f
S t a f f
Co s t
in
Pa p e r ,
P a r i s ,
p p .
Co n s tr u c tio n
o f
Ch a n g e ,
La b o r
Tr e a tm e n t
in
and
o f
I n d u s t r y ,"
S t a t i s t i c s ,
Pa p e r.
Re vie w ,
As s o c i a t i o n ,
o f
De c e m b e r
Se le c te d
19 6 7.
R e s e a r c h ,a n d d e v e l o p m e n t
Ec o n o m i c
19 6 6 ,
S t a t i s t i c s
Als o
s e e :
M o n th ly
5 7-6 1.
Ch a n g e s
La b o r
" Re la tio n s h ip s
May
th e
Bureau
Bu sin ess
" P r o d u c t i v i t y
M o n th ly
to
Ec o n o m i c
th e
S t a t i s t i c a l
P r o g r a m s ,"
A d j u s t m e n t ,"
o f
Co s t
19 72 ,
in
"M e asu rin g
Ja n u a r y
D .,
March
Am e r ic a n
Pr o c e e d in g s
Re vie w ,
La b o r
Pu b lic
C o n d itio n s ,
"Ch a n g e s
S e a r l e ,
o f
Ef f e c t
19 72 .
th e
In p u t
Li v i n g
La b o r ,
1 9 5 1 - 6 5 ,"
b u ild in g
8 8 .
and
An n e
S e a r l e ,
in
Pr ic e
C a l c u l a t i o n ,"
Co o p e ra tio n
" M a te r ia ls
Pr ic e s
Il l n e s s e s ,
La b o r
R e l a tiv e
o f
Au g u s t
" D e fl a t i o n
Ec o n o m i c
S c i t o v s k y ,
S e c t i o n ,
8 7.
W .,
" Th e
M ethod
S t a t i s t i c s ,
f o r
De p artm e n t
S e a r l e ,
and
19 73
P u r c h a s e s ,"
8 6 .
Th o m p s o n ,
Na tu re
O f f i c i a l
O r g a n i za t i o n
8 3 .
F .P .
It s
in
Re vie w ,
Betw een
Se le c te d
De c e m b e r
W artim e
Sh ip
19 4 8 .
Pr o d u c t i v i t y
M e a s u r e s ,"
19 5 4 .
Th o u g h ts
Pr ic e s
Ja n u a r y
Co n c ern in g
and
19 6 9 ,
Li v i n g
A l l o c a t i o n
C o n d itio n s ,
u n p u b lis h e d .
o f
U .S .
Qu a l i t y
Bureau
290
89»
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1973 Ar my Budget .
I TS.
U. S. Depar t me nt of Def ense, Of f i ce of t he As si st ant Se cr et ar y
( Compt r ol l er ) , " The Economi cs of Def ense Spendi ng — A Look at
Real i t i es, " Jul y 1972.
I nt er nat i onal Compar i son
Pr oduc t and Pur chasi ng Powe r
" 1973 Joi nt Economi c
" The Ar my Ma na ge me nt
292
116 »
U. S. Depar t me nt of Def ense, Of f i c e of t he As si st ant Secr et ar y
( Compt r ol l er ) , " Weapon Sy s t e m Cost i ng, " June 1970.
117,
U. S. Depar t me nt of Def ense, OASD ( Compt r ol l er ) ,
Cont r act Awar ds by Se r v i c e Cat egor y and Feder al
Cl assi f i cat i on, " FY 1973.
118 *
U. S. Depa r t me nt of Def ense, " Memor andum f or Secr et ar i es of Mi l i t a r y
Depar t ment s; Subj ect :
Gui dance f or POM Pr epar at i on, ’* Apr i l 1973,
119 .
U. S. De pa r t me nt of Def ense, Of f i ce of t he Deput y Assi st ant
Se cr et ar y of Def ense I nst al l at i ons and Housi ng, DOD 4 2 7 0 . 1- CG.
" Mi l i t ar y Const r uct i on Cost Re vi ew Gui de, " August 1973.
120.
U. S. Depa r t me nt of Labor ,
1039, " I nt er i m Adj ust me nt
12 1.
U. S. Depa r t me nt of Labor , Bur e au of La bor St at i st i cs, Bul l et i ns
Nos. 1226 ( 1958) ; 1514 ( 1966) ; 1776 ( 1972) " Pr oduct i vi t y:
A
Bi bl i ogr aphy" .
12 2 .
u. S. Depar t ment of Labor , Bur e au of La bor St at i st i cs,
No. 1458, Ha ndbook of La bor St a t i s t i c s . Oc t obe r 1966.
12 3 .
U. S. Depar t me nt of Labor , Bur e au of Labor St at i st i cs, Bul l et i n
No. 1517, " The Cons umer Pr i ce I ndex:
Hi st or y and Techni ques" .
124.
" Mi l i t ar y Pr i me
Suppl y
Bur eau of La bor St at i st i cs, Bul l et i n No.
of t he Cons ume r Pr i ce I ndex, " June 1951.
Bul l et i n
' U. S. De par t ment of Labor , Bur e au of La bor St at i st i cs, Bul l et i n
No. 1780, " I ndexes of out put Pe r Ma n- Hour — Se l ect ed I ndust r i es,
1973" ,
12 5 .
U. S. Depar t ment of Labor , Bur e au of La bor St at i st i cs, Busi ness
Resear ch Advi sor y Commi t t ee, " Mi nut es of t he Commi t t e e on Cons umer
and Whol esal e Pr i ces, " Febr uar y 18, 1964.
126.
U. S. De par t ment of Labor , Bur e a u of La bor St at i st i cs a nd Depar t ment
of t he Navy, " I ndexes of Navy Cont r a ct Pr i ces, " Wor l d Wa r I I
exper i ence, 1945.
i zf.
U. S. Depar t ment of Labor , Bur eau of La bor st at i st i cs, Mi ddl e
At l a nt i c Regi onal Of f i ce, Re por t No. 23, " Repor t I n t he 1971 Pr i ce
I ndex of Oper at i ng Cost s f or Uncont r ol l ed Apar t ment Houses 1n
Ne w Yor k Ci t y ” .
12 8 .
U. S. Depar t ment of Labor , l ur e a u of La bor St at i st i cs, Of f i ce of
Pr i ces a nd Li vi ng Condi t i ons, Di vi si on of I ndust r i al Pr i ces and
Pr i ce I nde x e s , * ”Gu1del 1nes f or Adj us t me nt of Ne w Aut omobi l e Pr i ces
f or Changes 1 n Qua l i t y of Pr oduc t , ” Augus t 1968.
u . S . Depar t ment of Labor , Bur e au of La bor St at i st i cs, Of f i ce of
Pr i ces and Li vi ng Condi t i ons, Di vi si on of I ndust r i al Pr i ces
and Pr i ce I ndexes, " Gui del i nes f or Adj us t me nt of Pr i ces f or
Ne w Tr act or s, Fa r m Ma chi ner y and Equi pment f or changes i n Qual i t y
of Pr oduct , " Ja nua r y 31, 1973.
293
130,
U. S. Depar t ment of Labor , Bur eau of La bor St at i st i cs, Of f i ce of
Pr i ces and Li vi ng Condi t i ons, Di vi si on of I ndust r i al Pr i ces and
Pr i ce I ndexes, " Pr i ce and Cost I ndexes f or t he Shi pbui l di ng
I ndust r y" .
U. S. Depar t ment of Labor , Bur eau of La bor St at i st i cs, Of f i c e of
Pr i ces and Li vi ng Condi t i ons, " Resear ch I n Est i mat i ng a Tr ue Cost
of Li vi ng I ndex, " De ce mbe r 1971.
13ï .
132.
133.
13 4
.
U. S. De par t ment of Labor , Bur e au of La bor St at i st i cs, Repor t No. 100
1, " Tr ends 1n Out put pe r Ma n- Hour and Man- Hour s pe r Uni t of Out put —
Manuf act ur i ng, 1939- 53, " 1955.
U. S. Depar t me nt of t he Navy, A1 r De vel opment Cent er , Re por t No.
NADC- SD- 7136, " User As Gui de f or Ec onomi c I ndi ces Updat i ng Pr ogr am
( Avi oni cs Equi pment ) , " Jul y 26, 1971.
U. S. Gener al Ac count i ng Of f i ce, " Compar i son of Mi l i t a r y Resear ch
and De ve l opment Expendi t ur es of t he U. S. and t he Sovi et Uni on,
Ja nuar y 21,
135.
1971.
U. S. Gener al Ac count i ng Of f i ce,
Feasi bi l i t y of Cons t r uc t 1 n g Pr 1 c
I ndexes f or We a pon Syst ems, " Repor t t o t he Joi nt Economi c Commi t t ee,
Congr ess of t he Uni t ed St at es, by t he Compt r ol l er Gener al of t he
Uni t ed St at es,
136.
137.
138.
Apr i l
1972.
U. S. Gener al Ac count i ng Of f i ce, " The Feasi bi l i t y of Const r uct i ng
Weapons Sy s t e m Pr i c e I ndexes, " Re por t t o t he J oi nt Economi c
Commi t t ee, U. S. Congr ess, Oc t obe r 1971.
U. S, Gener al Account i ng Of f i ce, Dr af t Repor t :
" Pr ovi si ons f or
I nf l at i on 1n Budget s f or Long- t er m Pr ogr ams, " Mar ch 197Z.
U .S .
Go ve r n m e n t.
Ye a r 1 9 7 4 ,
U .S .
Budget of t he U n l t e d St at es Gover nme nt
Gov e r nme nt Pr i nt i ng Of f i ce.
f or Fi scal
139.
U. S. Of f i ce of Manage me nt and Budget , Ci vi l Ser vi ce Commi ssi on,
and Gener al Ac count i ng Of f i ce, " Measur i ng and Enhanci ng
Pr oduct i vi t y I n t he Feder al Gover nment , " June 1973.
140.
U. S. Of f i ce of Ma na ge me nt and Budget , Ci vi l Se r vi ce Commi ssi on
and Gener al Account i ng Of f i ce, " Feder al Pr oduct i vi t y Me t hods,
Measur ement s, Resul t s, " ( a s t a f f st udy) , Augus t 1972.
141.
Mi nes t one. Robe r t L. , * A Mi l i t a r y Pe r s o n a l Pr l e e l nd e » . “
( Suppl ement t o RAC- TP- 289) , Resear ch Anal ysi s Cor por at i on,
RAC- TP- 3 11,
142.
June 1968.
Wl ne st one, Robe r t L. , and Be r nar d S. Beckl er , " MHI t a n r Pr i ce
I ndex:
Pr el i mi nar y Pr esent at i on, " Resear ch Anal ysi s Cor por at i on
Techni cal Pape r RAC- TP- 289, Ja nua r y 1968.
294
143.
Canada, Domi ni on of Nat i onal Def enc e Headquar t er s , Di r ec t or at e of
Cos t i ng Ser v i c es , " Canadi an For c es Ec onomi c Model , " May 1975.
144.
Canada, Domi ni on of ,
Model , " ED/ EC/ 74/ 31/ ,
145.
Mar k , J er ome A. , and Char l es W. Ar dol i ni , Dev el opment s i n Meas ur i ng
Pr oduc t i v i t y i n t he Feder al Sec t or , " 1974 Pr oc eedi ngs of t he Bus i nes s
and Ec onomi c St at i s t i c s Sec t i on, Amer i c an St at i s t i c al As s oc i at i on.
146.
Mar s h, D. R. , U. K. Mi ni s t r y of Def ens e, " The I nc r eas i ng Compl ex i t y
and Cos t of Def enc e Equi pment and t he I mpl i c at i ons f or Nat i onal Def enc e
Budget s and Pr ogr ammes , " 1974 NATO Def enc e Pl anni ng Wor k s hop, Ob e r a mme r q a n ,
J anuar y 1974, DS2/ 3- 5/ 15, Dec ember 1973.
147.
Uni t ed Nat i ons Sec r et ar i at , " A Sy s t em of
ST/ E5A/ STAT. 73, Febr uar y 1975.
NATO Del egat i on Paper ,
May 1974.
" Canadi an For c es
I nf l at i on
Quant i t y and Pr i c e St at i s t i c s , "
295
APPENDI X I - A
SUM M ARY
OF
PRICE
A
M EET I N G
D EFL A T O R
ON
FO R
F EB R U A R Y
Th is
a p p e n d ix
Ec o n o m i c
purpose
o f
e xp e rts
th e
o f
from
8 ,
OF
A
EX P EN D I T U R ES
19 73
i n v i t e d .
th is
a p p e n d ix.
A
Ex h i b i t
2 ,
m eeting
la s te d
was
e xp e c te d .
ta p e s .
an
e d ite d
on
th e
m eetin g
p r ic e
m ost
th e
and
o n ly
f u l l
one
tapes
iss u e s
w ith
and
w ere
o f
w hich
in
th e
o f
f o r
th e
pros
on
h e ld
a t
th e
on
Fe b r u a r y
8 ,
19 73 .
c on c e p tu al
problem s
r e la te d
m i l i t a r y
o f
p r i v a t e
p a r ti c i p a n ts
m eeting
d i s t r i b u t e d
d a y ,
c l e a r
tr a n s c r ib e d
cons
e xp e n d itu r e s .
is
and
p re se n te d
a g e n d a ,
th e
w hich
1
o f
is
p re se n te d
in
o f
take n
by
m in u tes
Se c tio n
p r ic e
th e
th e
Sin c e
d isc u sse d
in
th e
Ex h i b i t
to p ic s
typ e d
to
in
to
i n t o
Th e
governm ent
p a r t i c i p a n t s .
w ere
Bureau
W e ll-k n o w n
r e s o lu tio n s
p re se n te d
develop m en t
and
m eetin g
in d u s tr y
to
s tim u la tin g
a re
a
Co m m e r c e ,
d isc u s s
a m b itio u s
p re p are d
ve r s io n
e xp e n d itu re s
to
f i e l d s
o f
Nu m e r o u s
Th e
b a s ic
w as
d e fl a to r s
l i s t
A
in fo r m a tio n
De p artm e n t
a p p r o p r ia te
w ere
on
c o n ta in s
A n a l y s i s ,
developm en t
n o t
D EV EL O P M EN T
In tr o d u c tio n
A .
o f
THE
M I LI T A R Y
B .
o f
Th e
d e fl a to r s
va rio u s
problem s
and
th e
w ere
re c o rd e d
m e e tin g ,
m in u tes
f o r
th e
fo c u s
m i l i t a r y
p a r t i c i p a n t s .
296
EX H I B I T
1
-
LI S T
OF
PARTICIPANTS
Pr i v a t e
Do ris
Ik lè
Co n s u lta n t
Ec o n o m i c
Ed w a r d
De n is o n
Ro b e rt
Li p s e y
to
th e
Bureau
o f
An a ly s is
Bro o k in g s
Na tio n a l
I n s t i t u t e
Bureau
o f
Ec o n o m i c
Re s e a r c h
Ir v i n g
Kra vis
M o r r is
B o r n s te in
U n i v e r s i t y
o f
Pe n n s ylva n ia
U n i v e r s i t y
o f
M ic h ig an
Go v e r n m e n t
Ru th
Siva r d
Da n ie l
Ca rl
Ar m s
G a l l i k
Ke s s le r
M a r tin
L .
A .
Ja c k
Go tts e g e n
Ja m e s
W aite
De i Ro s s i
Ja c k
T r i p l e t t
Jo e l
Po p k in
Ric h a rd
and
Disa rm am e n t
Ge n e r a l
Ac c o u n tin g
Offi c e
M arim ont
Ch a rle s
J .
Co n tro l
Ag e n c y
M c Do n a ld
Bureau
o f
Na tio n a l
Bureau
o f
Ec o n o m i c
Bureau
La b o r
o f
An a ly s is
Stan d ard s
S t a t i s t i c s
29 7
EXHI BI T 2 - MEETI NG AGENDA
I .
Sta te m e n t
o f
Pr o b l e m
A .
Th e
need
f o r
a
B 0
Na tio n a l
and
In te r n a tio n a l
s tu d y
C.
M a jo r
d e fi c i e n c i e s ,
Eg :
c h e c k l is t
-
W hat
-
Ho w
are
to
-
A .
W hat
1„
s o r t
o f
Id e a l
Eg :
-
fo r c e
-
2 .
Pr a c tic a l
Eg :
and
and
Ph ys ic a l
-
Re s o u r c e s
m i l i t a r y
ac h ie ve d
t h r e a t
c h an gin g
o f
e s ta b lis h m e n t
(p ro b le m s
o f
m u ltip le
assessm en t)
u t i l i t y
o r
q u a l i t y ,
by
u t i l i t i e s
and
th e
w e ig h t
o u tp u t
m easures
can
o f
fo rc e ?
consum ed— va lu e d
o p p o r tu n ity
c o s t?
changes
resou rc es
-
p ric e d ?
system
m easures
Ho w
th e
Are a
problem
-
-
o f
M i l i t a r y
be
e ffe c t i v e n e s s ,
o r
M u l tip le
in g
sh o u ld
s e c u r ity
M i l i t a r y
p r o d u c t i v i t y
En t i r e
o u tp u t
fu n c tio n s
-
p r ic e
(u n iq u e )?
to
goods
Na tio n a l
m i l i t a r y
change?
problem s
o f
in
goods?
f o r
Ap p lie d
m easures
problem s
m i l i t a r y
m i l i t a r y
(Ga l 1 i k )
s t a t u s ,
( Ik l e )
q u a l i t y
Co n s id e ra tio n s
in d exes
(W a ite )
a c c o u n t
In d e xin g
p r ic e s
p r a c tic e s — p re s e n t
p ro s p e c ts
and
Ge n e r a l
m i l i t a r y
th e o r e tic a l/ c o n c e p tu a l
in d e xin g — a
I I .
o f
Li m i t a t i o n s
be
in
a t
a c tu a l
c o st?
Al te r n a tiv e s ?
q u a l i t y
o r
e ffe c tiv e n e s s
o f
m easured?
due
to
c ustom ary
b udget
a c c o u n tin g
c a te g o r ie s .
B .
Ge n e r a l
1 .
problem s
Ad e q u a c y
Eg :
2 .
Ho w
o f
to
o f
o f
c o n tr a c t
Ca p ita l
t r e a t
p r ic e
m easurem ent
o r
c o s ts ?
e ffe c t s
procurem ent?
on
p roc u rem en t
R& D
p ric e s
c osts?
p r ic e
changes
in
s c a le
o r
tim in g
298
EXHI BI T 2 ( Cont i nued)
N O T E:
Pr o b le m s
o f
a ffe c t i n g
I I I .
Pr o b l e m s
A .
c o n c e rn ,
u n le ss
to
in d e x in g .
p r ic e
S p e c i fi c
(An a lo g o u s
to
c al
to
th o se
Pr o c u r e m e n t
o f
P a r t i c u l a r
above
m a jo r
b u t
th e
to
d e c id in g
w i l l
n o t
m a te r ia l
o r
be
is
o r
o u r
u s e fu l
Fu n c t i o n s
g ive n
(s u b je c t
a re a )
to
r a p id
te c h n o lo g i
C o s t-e ffe c tiv e n e s s
In d e xe s
o f
-
Qu a l i t y
change
te c h n o lo g ic a l
advan c em en t
m e th o d o lo g ie s
(r e g r e s s io n
a n a ly s is
p r ic e s )
Co n fig u r a tio n
changes
Pe r s o n n e l
1.
Pr oduc t i vi t y
Eg :
-
Co m p o sitio n
-
Re c e n t
2 .
Vo lu n te e rs
-
Tr e a tm e n t
-
Fr i n g e
o f
p u b lic
v s .
c o n s c rip te e s
o f
r e t i r e d
b e n e fits
and
pay
in c e n tive s
s e r vic e s
1 .
De lin e a tio n
Fu n d i n g
3 .
Measures
Oth e r
Re la te s
s tu d ie s
p r o d u c t i v i t y
-
2 .
Pr o b l e m s
rank
Pr ic e s
Eg :
R& D
by
in te ra g e n c y
s e c to r
I V .
in
se
Re s o u r c e s
equipm ent
-
-
D.
o f
u n ique
-
lin k e d
Co
som e
£ e r
change)
Eg :
B .
c o s t-e s tim a tin g
proc urem ent
Ar e a s :
in
to
o f
o f
o u tp u t
and
and
Co m p a rin g
M i l i t a r y
Pr ic e
tre a tm e n t
in
p r o d u c t i v i t y
C o n s tr u c tio n ;
M i l i t a r y
Eg :
scope
a l t e r n a t i v e s
O& M ;
Oth e r
p r ic e
change
proc urem ent
Ex p e n d i t u r e s
Am o n g
Co u n trie s
(As
In d e xin g )
-
Co m p a r a b ility
o f
scope
-
Co m p a r a b ility
o f
u t i l i t y
-
Co ve ra g e
and
m eaning
o f
o f
e xp e n d itu re s
and
q u a l i t y
p r ic e s
o r
e xp e n d itu re
299
EX H I B I T
2
(Co n tin u e d )
ac c ou n ts
-
A v a i l a b i l i t y
-
B i l a t e r a l
v s 0
o f
p r ic e
and
m u l t i l a t e r a l
q u a n t i t y
d ata
com parisons
300
Bo
Ed i t e d
Th e
t i v e s
Ve rs io n
o f
d is c u s s io n
by
Ga l 1 i k
im m ediate
needs
o f
th e
M in u te s
opened
Ar m s
f o r
a
w ith
a
Co n tro l
s tu d y
o f
M e e tin g 1/
b r i e f
and
o f
th e
s ta te m e n t
Dis a rm a m e n t
m i l i t a r y
p r ic e
on
needs
Ag e n c y
and
o b je c
(ACDA).
in d ic e s
w ere
Th e i r
n ote d
as
fo l l o w s :
.
d e fl a te
th e
ACDA
e xp e n d itu re s
M i l i t a r y
.
a s s i s t
o f
in
th e
m i l i t a r y
a s s i s t
in
s h a rin g
Bureau
o f
and
re s o u rc e s
.
e s tim a tio n
.
W aite
g oal
and
p rep are
fo u n d
Th is
o f
Ev e n
s e c tio n
th e
Ga l 1 i k
a
o f
and
a
th e
n o te *
to
in c lu d e d
o f
im pac t
m i l i t a r y
econom ic
m ore
burden
t h a t
p r ic e
w o r ld w id e .
th e
in
ap p e n d ix
ACDA
by
is
r e l i e s
in te r n a l
d e velop ed
p ap er
has
p .
w ith in
w ith
th e
tim e
in d e x .
f o r
th e
o r
Un ite d
i n d ic e s .
c o n c e n tra te d
s t a t i s t i c s
th an
c o n s ta n t
p r a c tic e
c o n tr a c t
w o r ld .
in d e x
Le s s
ACDA
fo l l o w i n g :
p r ic e
in d e x
B EA
th e
ac h ie ve d
th e
th e
a c c u ra te
m i l i t a r y
m inim al
o f
o f
be
m i l i t a r y
r e s t
e xp la in
an
g o a ls
( B EA )
id e a l
e xp e n d itu re s
m e e tin g ,
econom ic
m i l i t a r y
W orld
e xp e n d itu re
b ein g
s t a t e -o f -t h e -a r t
system s
t h i s
th e
o f
and
c om parisons
end
m ain
Th e y
th e
to
t h a t
d e fe n se
N a ti o n s .
1/
on
one
An a ly s is
and
com pute
w ent
to
th re e
a v a i l a b l e .
u n d erd evelop ed
n a tio n a l
th e
Ec o n o m i c
Sta te s
r e p o r t ,
a g re e m e n ts.
i n t e r n a ti o n a l
d is c o ve r
o
o f
ACDA
a n a l y s i s .
e xp la in e d
th e
ta b u la tio n
annual
e xp e n d itu r e s
e xp e n d itu re s
W aite
w o rld w id e
th e
Ex p e n d i t u r e s .
l i m i t a t i o n
.
in
b ein g
to
th e
am ong
second
th e
c o u n tr ie s
th e
m ore
r e p o r t
Un ite d
d is c o n tin u e d .
h e a v i ly
m em orandum
W a lk e r ,
a re
fo u r te e n
p ric e s
on
a
oh
th e
typ e d
p re p are d
p a s t
by
em ployee
t r a n s c r i p t
Dan ie l
o f
B EA .
301
Ther e i s al so a wor l dwi de l ack of desc r i pt i ve i nf or mat i on on
i ndex comput at i on.
I n gener al ,
cons umpt i on ( nat i onal
payr ol l
and al l
count r i es have di vi ded gover nment
def ens e i s usual l y not ex ami ned separ at el y)
ot her pur chases.
i ndexes— t he base y ear payr ol l
gover nment empl oyees,
Payr ol l
i s def l at ed usi ng quant i t y
i s ex t r apol at ed by t he number of
bot h mi l i t ar y and ci vi l i an.
i n t he def l at i on of payr ol l
i nt o
A second appr oach
i s t o use t he Cons uner Pr i ce I ndex ( CPI ) .
Thi s gi ves one a cons i s t ent l y hi gher r eal
gover nment compensat i on due
t o i t s i ncl usi on of pr oduc t i vi t y i ncr eases.
I n def l at i ng gover nment cons umpt i on f or al l
ot her pur chases,
combi nat i ons of CPI ' s and Whol es al e Pr i ce I ndexes ( WPI ' s)
t o def l at e cost s t o t he ex t ent t hat
cr af t
pur chases,
shi p pur chases,
ar e used
i nf or mat i on 1s av ai l abl e on ai r
et c.
I t appear s t hat onl y t he Uni t ed
Ki ngdom has a sy st emat i c col l ect i on of dat a on pr i ces ac t ual l y pai d by
t he gover nment .
Al t hough t he st at i st i cal
Wai t e f ound st r ong i nt er est
mai nl y f r om t wo sour ces:
sy st em i s i n a l ow st at e of devel opment ,
i n our r esear ch.
Thi s i nt er est st emmed
t he Def ense Mi ni st r i es and r el at ed agenci es
who mus t es t i mat e def ense spendi ng,
and t he t r easur i es who must j ust i f y
t he budget expendi t ur es.
Wai t e hi ghl i ght ed t he f ol l owi ng wor l dwi de r esear ch i n pr ogr ess:
( a)
The U. N.
gover nment
i s accumul at i ng dat a on f i nal
consumpt i on;
demand cat egor i es ,
t he Eur opean segment
cont i nui ng on t he r est of t he wor l d;
i ncl udi ng
i s compl et e and wor k i s
( b) t he OECD i s doi ng wor k si mi l ar
t 0 t he U. N. ; ( c) The Common Mar k et seems t o be t he mos t advanc ed wi t h
sever al
pr oj ect s under way t o i mpr ove measur es of cons t ant
pr i ces i n t he
302
publ i c sect or ;
( d) The U. S.
Def ense Depar t ment
( Compt r ol l er ' s Of f i ce)
has publ i shed a set of pr i ce i ndi ces whi ch assumes no pr oduc t i vi t y
i ncr ease;
t hi s al l ows t hem t o st at e i n t hei r r epor t
Def ense Spendi ng:
A Look at t he Real i t i es, "
GNP t he def ense budget
non- payr ol l
i s ext r emel y l ow.
" Economi cs of
t hat as a per cent age of
The i ndex DOD uses f or t he
ar ea i s an unpubl i s hed Commer ce def l at or f or Feder al
pur chases of goods and ser vi ces l ess t he compensat i on of empl oyees
and Depar t ment
of Agr i cul t ur e pur chases.
cont r act escal at i on cl auses;
DOD i s al so doi ng wor k on
( e) The Resear ch Anal ys i s Cor por at i on
di d wor k i n 1968 on R&D and t he ent i r e Def ense budget ;
r ecent l y i ssued t he r epor t ,
( f ) The GAO
" Feasi bi l i t y of Const r uct i ng Weapons
Sy s t em and Pr i ce I ndexes, " whi ch i ndi cat es t hat i nput pr i ces,
out put
pr i ces,
ar e meas ur abl e.
They sugges t ed t hat cont r act or s submi t
dat a t o DOD on l abor and mat er i al
cost s,
and t hat t he BLS pr epar e
i ndust r y wi de pr i ce i ndexes f or weapons syst ems;
Labor St at i st i cs has been st udyi ng meas ur ement
Feder al
Gover nment ;
( h)
but not
( g) The Bur eau of
of pr oduc t i vi t y i n t he
RAND has done some r esear ch,
pr i or t o 1971,
on
R&D and aer ospac e pr i ce i ndexes.
The maj or dr awbacks t o most
pr i or st udi es ar e:
ar e meas ur ed r at her t han out put pr i ces;
sect or s i s over l ooked;
( a)
( b) Pr oduc t i vi t y i n t he publ i c
( c) WPI ' s ar e mos t of t en used al t hough t hey at
t i mes may be i r r el evant or CPI ' s mi ght be mor e accur at e.
f eel
I nput pr i ces
Wai t e di d not
opt i mi st i c about t he f ut ur e of dat a col l ec t i on and i ndex f or mat i on
f or mi l i t ar y spendi ng,
mi ght be i mpr oved,
but he hoped t hat t he pr esent st at e of t he ar t
at l east
i n t he ar ea of pr oduc t i vi t y changes i n t he
303
gover nment sect or .
The meet i ng el i c i t ed a vi gor ous di scussi on,
on a number of basi c i ssues.
I kl i
al bei t
r evi ewed sever al
i nconcl usi ve,
maj or concept ual
pr obl ems i n mi l i t ar y pr i ce i ndexi ng based on t he pr emi se t hat def ense
expendi t ur es ar e di f f er ent f r om ot her t ypes of expendi t ur es:
Fi r st ,
mi l i t ar y spendi ng i s a r ef l ect i on of l egi sl at ed pr i ces.
The bi ggest
l egi sl at ed pr i ce change appear s i n t he ev ol ut i on of t he
cons cr i pt Ar my i nt o a vol unt eer Ar my.
I s t hi s a f ul l
pr i ce change or
a qual i t y change as wel l ?
Second,
t her e i s t he pr obl em of demand i nf l uenci ng pr i ce and pr i ce
i nf l uenci ng demand i n t he def ense sect or .
pr i or i t y,
i t s devel opment
I f a pr oj ect has hi gh
i s accel er at ed, whi c h i n t ur n i ncr eases t he
pr i ce t hr ough over t i me cost s.
Cost al l ocat i on i s a t hi r d concer n i n t he def ense sect or .
cost s ar e handl ed separ at el y f r om pr oduct i on cost s;
f l uc t uat e mor e t han i n gener al
On t he over al l
ar e uni que,
R?<D
over head appear s t o
i ndust r y.
ques t i on of whet her mi l i t ar y pr i ce i ndex pr obl ems
Popki n and Tr i pl et t ar gued t he negat i ve on t he gr ounds t hat
any t ype of pr obl em i n t he mi l i t ar y ar ea can be f ound el sewher e.
exper t s ( Kr avi s,
Deni son,
I kl i , Wai t e)
Ot her
ar gued t hat i t was a mat t er of
degr ee and t he wei ght of t he pr obl ems was much gr eat er i n t he mi l i t ar y.
What ar e t he goods and ser vi ces t o be pr i ced?
concept i ons of mi l i t ar y out put ,
di scussed:
Thr ee al t er nat i v e
t he good or ser vi ce t o be pr i ced, wer e
secur i t y, mi l i t ar y ut i l i t y,
and r esour ces consumed.
None
304
f avor ed a meas ur e of secur i t y achi eved, whi c h t akes account of changes
i n opposi ng t hr eat .
Such a meas ur e was cons i der ed i mpr act i cal
i n t hat
i t coul d not be i mpl ement ed st at i st i cal l y.
Some exper t s st r ongl y f avor ed mi l i t ar y ut i l i t y,
i n t he sens e of
some obj ect i v e meas ur e of capaci t y t o do wor k by f or ces or equi pment
( I kl £,
Kr avi s) .
I t was poi nt ed out ,
however ,
t hat even ut i l i t y i s
condi t i oned by changes i n st r at egi c t hi nki ng and i n count er pos ed f or ces
( Li psey) .
The sugges t i on by I kl £ t hat t he j udgment s of spendi ng
deci si on- maker s ( t he mi l i t ar y ,
Congr ess)
be used as measur es of
ut i l i t y
was ques t i oned by Li psey,
on gr ounds of anal ogy wi t h ot her pr i ce i ndex
t heor i es,
on t he gr ounds t hat t hese j udgment s ar e based
and by Deni son,
on pr oj ect i ons of t hr eat , whi c h may be qui t e wr ong.
Some exper t s f el t t hat
pr act i cal
r esour ces cons umed ( or i nput s) wer e t he onl y
meas ur abl e quant i t y ( Li psey, Tr i pl et t ,
et al . ) .
Thi s i s t he
way t he ser vi ces of gover nment ar e conv ent i onal l y meas ur ed i n nat i onal
i ncome account s,
al t hough i t i s conc eded t hat
t hi s does not r eal l y
meas ur e t he val ue of t he ser vi ces per f or med ( out put ) .
Deni son sugges t ed t hat
i n pr act i cal
t er ms,
t he r esul t s f or t he
t hr ee al t er nat i v e " out put s" woul d t end t o be si mi l ar f or secur i t y and
r esour ces consumed.
Bor nst ei n sugges t ed t hat t he out put of mi l i t ar y
ser v i c es shoul d i ncl ude t he ser vi ces of t he ent i r e st ock of capi t al
i n bei ng,
and not si mpl y t he addi t i ons t o t hos e st ocks i n each year .
He r ecommended t hat t he st udy i ncl ude an annex devot ed t o an ex ami na
t i on of t hi s concept .
How. t o ac count f or changes i n t he qual i t y or " pr oduct i vi t y" of
305
i nput s ( gi ven t hat ,
i n pr act i cal
t er ms,
i nput s ar e t he " out put " usual l y
meas ur ed) ?
I n a wi de- r angi ng di scus si on of t hi s set of pr obl ems,
and Dei Rossi
want ed t o meas ur e " bang per buck, "
I kl £,
Kr avi s,
usi ng mi l i t ar y anal yses
of ef f ect i veness as t he basi s f or meas ur i ng pr oduc t i vi t y ( how much
bang) .
Dei Rossi ,
ci t i ng RAND st udi es i n t he cost - ef f ec t i venes s f i el d
i n whi ch he f or mer l y par t i ci pat ed,
f el t t hat t he moder ni z at i on or
qual i t y- change i nf l uence on pr i ce change coul d be succ essf ul l y
meas ur ed.
Thi s i nput - pr oduc t i vi t y concept
appear ed t o Gal 1i k t o r esembl e
cl os el y t he ut i l i t y or c apaci t y concept di sc us sed ear l i er .
Pr act i cal
di f f er ences mi ght ar i se i n t hat ut i l i t y woul d be meas ur ed i n br oader
scope — f or ent i r e mi l i t ar y es t abl i shment s or t ypes of f or ces,
possi bl y i ncl udi ng cons i der at i ons of change i n t hei r f unct i on or t ask,
wher eas i nput pr oduc t i vi t y woul d appl y t o nar r ower weapons syst ems,
wi t h l ess oppor t uni t y t o c ons i der changes i n t ask.
Ot her s f el t such i nput pr oduc t i vi t y meas ur es wer e i mpr ac t i cal l y
di f f i c ul t
( Li psey,
Popki n, Tr i pl et t ) .
Deni son sugges t ed t hat si nce
mi l i t ar y t echnol ogy t ended t o di f f use r api dl y among count r i es and t he
r esul t i ng " secur i t y" ac hi ev ed t her ef or e r emai ned r oughl y const ant ,
meas ur ement
of
( appar ent )
t he
pr oduc t i vi t y changes i n each s i de’ s mi l i t ar y
i nput s woul d be mi sl eadi ng.
Tr i pl et t
f el t t hat f or a l ar ge shar e of DOD ex pendi t ur es pr esent l y
av ai l abl e Whol es al e Pr i c e I ndexes ( WPI ' s) wer e adequat e.
ques t i oned by Wai t e,
Kess l er and Kr avi s.
Thi s was
Wai t e poi nt ed out t hat
pr esent
306
met hods f or def l at i ng per sonnel
compensat i on out l ays I n nat i onal
account i ng do not r ecogni z e changes 1n pr oduct i vi t y,
met hods pr obabl y wi l l
I ncome
and t hat t hese
not be I mpr oved i n t he near f ut ur e.
On t he ques t i on of pr i ce i ndexes f or mi l i t ar y R&D,
I kl d and Kr avi s
poi nt ed t hat RAC or NSF pr i ce i ndexes based sol el y on manpower i nput s,
i gnor ed capi t al
i nput s and changes i n pr oduct i vi t y.
I kl £ f el t t hat
some
aver age meas ur e of pr oduc t i vi t y change bor r owed f r om el sewher e was
pr ef er abl e t o t he as sumpt i on of no change.
equi pment capaci t y i n R&D i ncr eases,
so t hat
t he r el evant pr obl ems become l ar ger
pr oduc t i vi t y r emai ns const ant .
pr act i cal
Tr i pl et t sugges t ed t hat as
Li ps ey and Wai t e quest i oned t he
possi bi l i t i es f or meas ur i ng such pr oduc t i vi t y changes.
A di scussi on of pr oc ur ement pr i ci ng pr obl ems r evol ved mai nl y ar ound
t he adequacy wi t h whi c h R&D cost s wer e r ef l ect ed i n i t .
Kr avi s sai d
separ at e R&D f undi ng shoul d be as soci at ed wi t h a pr oduc t gr oup t o t he
ex t ent
possi bl e.
On t he quest i on of per sonnel
out l ays,
on r et i r ed pay and f r i nge benef i t s.
di sc us si on cent er ed pr i mar i l y
I t was gener al l y agr eed t hat
r et i r ed pay i deal l y shoul d be i ncl uded on an accr ual
cash basi s.
On vol unt eer s ver sus conscr i pt ees ,
basi s r at her t han
Bor nst ei n sugges t ed a
r evi ew of pr evi ous st udi es.
At
t he r equest of Si var d t he exper t s wer e pol l ed as t o what
t hey
woul d r ecommend be used f or def l at i ng wor l d mi l i t ar y ex pendi t ur es dat a,
af t er Gal l i k ex pl ai ned pr esent pr act i ces.
I n vi ew of t he l i mi t at i ons
of t he dat a i n t hi s ar ea i t was r ecogni z ed t hat sophi s t i cat ed t echni ques
woul d not be possi bl e f or most count r i es.
Sever al
par t i ci pant s
3 0 7
advocat ed a pr i mar y spl i t of ex pendi t ur es i nt o:
( 1)
per sonnel
def l at ed t hr ough use of a si mpl e i ndex of quant i t y ( no.
( 2)
ot her ,
def l at or .
by whol es al e,
gover nment
pur chases,
t o be
of men) ,
and
or ot her sur r ogat e
For s mal l er count r i es, wher e t he composi t i on of t he
ex pendi t ur es was not known,
st andar d wei ght s coul d be used ( e. g. ,
3/ 4
f or manpower ) .
Deni son r ecommended di f f er ent i al
l ar ger spender s,
t r eat ment ,
mor e sophi s t i cat ed f or
and mor e conv eni ent f or smal l er .
i mpor t ance of t he base y ear empl oyed.
Tr i pl et t sugges t ed t he use of a
f i x ed i nvest ment def l at or f or t he " ot her " por t i on.
use of t he gover nment
ex t ent avai l abl e.
r at i o of t ot al
Wai t e r ecommended
pur chases def l at or by i j aj or component s t o t he
Li ps ey sugges t ed t hat f or smal l
count r i es,
a si mpl e
out l ays t o number of men mi ght even suf f i ce.
The di sc us si on r ecogni z ed t hat
not
He al so ar gued t he
a
si mpl e number - of - men i ndex coul d
t ake ac count of changes i n t he l evel
of mi l i t ar y t echnol ogy or i n
per sonnel
ski l l
l evel s and woul d t end t o at t r i but e f al sel y t o i nf l at i on
some r eal
i ncr eases i n t he val ue of mi l i t ar y pur chases.
Wai t e sai d t hat
t aki ng account of changes i n r ank composi t i on woul d hel p 1n some par t
and t hat some account of qual i t y change mi ght be t aken i n t he non
per sonnel
pur chases def l at or .
I t was sugges t ed t hat pr oduc t i vi t y change
coul d be at t r i but ed t o ei t her t he equi pment or t he per sonnel
ser vi ces
pur chases.
Sever al
par t i ci pant s not ed t hat i n t he case of many count r i es,
av ai l abi l i t y of dat a wi l l
l i mi t t he opt i ons and t hat t he i mpor t ance of
t he count r y shoul d i nf l uence t he met hod chosen.
308
A number of maj or and mi nor i ssues wer e r ai sed at
t hr oughout
t he meet i ng.
var i ous t i mes
Di scussi on on some of t hese i ssues t ook t he
f or m of a si mpl e pr ocl amat i on of t he pr obl em.
Wi t h some r edundancy t he
mai n poi nt s f ol l owWai t e ques t i oned how GAO sel ect ed WPI ' s f or use i n cost es cal at i on
cl auses i n pr oc ur ement cont r act s.
best
i ndex r eadi l y avai l abl e,
Kessl er st at ed t hat WPI ' s wer e t he
al t hough t hey have been cr i t i ci zed f r om
t he st andpoi nt of r el i ance.
For exampl e,
of ai r c r af t engi nes,
f or al umi num wi ndow f r ames i s not
t he WPI
t o def l at e t he met al
component
appr opr i at e.
Mar i mont ques t i oned how one t akes i nt o ac count t he suppor t / combat
r at i o of sol di er s.
Wai t e ex panded on t he poi nt by st at i ng t hat i f t he
mi l i t ar y became mor e ef f i ci ent
by havi ng f ewer men per combat man,
it
woul d not necess ar i l y be an i ncr ease i n out put per man.
Bor nst ei n coul d see a l ar ge pr obl em i n ac count i ng f or equi pment
subs t i t ut i on i n pr oduct i vi t y.
M- 14 r i f l e,
I f t he t t - 16 aut omat i c r i f l e r epl aces t he
i t i mpr oves t he pr oduc t i vi t y of t he sol di er over a l onger
per i od of t i me t han t he y ear i n whi c h i t was i nt r oduced.
sugges t ed an al t er nat i v e sol ut i on.
past ac cumul at i ons.
f i gur es.
Comput e a capi t al
Deni son
st ock f i gur e f r om
Depr eci at e t he st ock and change t he cur r ent dol l ar
Wai t e ques t i oned t he f eas abi l i t y of t he al t er nat i v e because
t he per pet ual
i nvent or y met hod woul d be di f f i c ul t t o appl y t o t he
mi l i t ar y ar ei .
The meet i ng ended wi t h t he under st andi ng t hat a si gni f i c ant number
of i ssues must be addr es sed t hr oughout t he cour se of t he r esear ch pr oj ect .
APPENDI X
WHAT A PRI CE
II
-
A
I NDEX SHOUL D MEASURE
By
Do r i s
Co n s u l t a n t
to
t he
M.
I kl e
Bu r e a u
Au g u s t
23,
of
1974
Ec o n o mi c
An a l y s i
310
1
I NTRODUCTI ON
Mo s t
to
pr i c e
adj us t
c o mp a r e d
f er enc e
t he
i ndi c es
v al ue
t o t he
v al ue
ex c l udes
t he
t o n o w e c o n o mi s t s
wh e t h e r
hav e
t he
t hat
v al ue
of
t he
as
ma n y
goods
c ost
l as t
mu s t
be
i n or der
t hat
t he
ev er y
pr i c e
t he
pr i c e
hal f
l as t
we r e
y ear ' s
pr i c es
of
i ndex
of
pr i c es
by
as
t he
pr i c e
c o mmo d i t y
t ot al
RE t h a t
of
E.
t he
f i r st
ev er y
c o mmo d i t y
wa s
E t i me s
wh i l e
t hi s
E wi l l
of
l as t
f or
RE t h a t
t hi s
v al ue
wh e r e
y ear ,
wa s
is
t he
of
c as e,
pur c has ed
y ear
def i ned
v al ues
y ear
quant i t y
is
t ot al
t hi s
t he
and
t he
j udgi ng
c o mmo d i t y
if
now a t hi r d
t hi s
1/ E)
f or
s uc h
ef f ec t
y ear ,
Up
do e s
t he
l as t
di f
c as es
y ear ' s
by
is
v al ue
on
s pec i al
ev er y
l as t
it
a c r i t er i on
i ncl ude
c or r ec t
f i r st
of
wh e n
--
di f f er enc es .
not
y ear
y ear
t wo
pur pos e
t he
does
t hi s
t hi s
t hat
pr i c e
f i nd
f or
y ear ' s
c o mmo d i t i e s
of
to
y ear ,
of
t he
so
one
aggr egat e
t he
pr i c e
t hat
Co n s i d e r
i ng
t he
R t i me s
y ear ,
of
f or
pr i c e di f f er enc es
On l y
t hi s
L i k e wi s e ,
is
anot her
t he
l as t
E ( or
c o mp a r i s o n
c hange.
y ear
by
aggr egat e
f ai l ed
of
of
c ons t r uc t ed
ef f ec t
If
ex i s t .
mu l t i p l i e d
t ot al
of
hav e
ef f ec t
E t i me s
al l
one
b e e n e l i mi n a t e d .
c r i t er i on
is
of
ar e
t he
y ear
of
s ec ond
as
l as t
l as t
y ear .
e l i mi n a t e
t he
hal f
and
hal f
t hat
R t i me s
t hei r
Mu l t i p l y
ef f ec t
of 1
1. Th e i n d e x d i s c u s s e d i n t h i s p a p e r wa s f i r s t p r e s e n t e d
i n my a r t i c l e " A Ne w Ap p r o a c h t o t he I n d e x Nu mb e r Pr o b l e m, "
Qu a r t e r l y J o u r n a l
of Ec o n o mi c s , Ma y 1972, pp. 1 8 8 - 2 1 1 .
a
311
t he
pr i c e
di f f e r e nc e s
t he
f i r st
ha l f
ha l f
R t i me s
The
unl e s s
t he
as
t he
t hos e
t wo
a v e r a ge
pr i c e
of
Whe n
t ha t
t he
i nde x ,
pr i c e
di f f e r e nc e s
on
ha l v e s
v a l ue s
of
not
is
t hi s
t he
as
is
t he
ef f ect
year ' s
mo n e y . )
h o we v e r ,
s a me
we
of
out put
( f or
s e c ond
mu c h
s a t i s f i e d,
t he
ha l f
a ddi t i v e ,
c o mmo d i t y
e l i mi n a t e s
f or
R t i me s
ar e
c ondi t i on
E,
each
i de nt i c a l ,
c os t
each
f or
f or
can
t he
c onc l ude
pr i c e
c o mp a r e d
to
y e a r 1s .
Wh i l e
t hi s
e x t r e me l y
a c t ua l l y
much'
as
a v e r a ge
to
e x a mp l e
us e f ul .
The
pur c ha s e d
in
t he
f act
uni t
t he
gr oup.
f or
t he
t hi s
v a l ue s
be
wo u l d
of
ha l v e s . 2
as
t ot a l
wo u l d
go o d s
bot h
l ast
t he
pr i c e s
ma n y
v a l ue s
on
Di v i d i n g
s e pa r a t i ng
qua nt i t y
t he
t he
a c t ua l
each
wa s
i nt o
s t r uc t ur a l
pr i c e
pa r t s
c ha nge
not
at
t he
is
wi t h i n
is
is
i r r e l e v a nt ,
i nde x
di s pe r s i on
t wo
is
pur c ha s e d
pr i c e
it
we r e
i ndi c a t e d
not
The
pr i c e
gr oup
a ggr e ga t e s
por t i ons
uni t
ar t i f i ci al ,
ne ut r a l
a c o mmo d i t y
me r e l y
f r o m t he
a
t e c hni que
s t r uc t ur a l
c ha nge .
Any
t wo
e c o n o mi e s
can
a l wa y s
f or
d e t e r mi n i n g
t he
pr i c e
di f f e r e nc e s
t he
v a l ue
of
( 1)
f or
2.
hi ghl y
i r r e l e v a nt .
or
t he
t ha t
t wo
each
is
a s s u me d
a ppe a r
f act
t ha t
pr i c e
ma y
be
one
e x pr e s s e d
pa r t
t hi s
wh e t h e r
each
Thi s
wh o s e
po i n t
a nd
wa y .
A c r i t e r i on
a pr i c e
on
t he
c o mmo d i t y
t he
pr i c e
i nde x
v a l ue s
is
e x pl a i ne d
of
by
s t r uc t ur e s
t he r e f or e
e l i mi n a t e s
of
di v i de d
qua nt i t i e s
is
qua nt i t y
each
a ny
i nt o
t wo
t he
pa r t s ,
c o mmo d i t y
a n u me r i c
in
e x a mp l e
exi st s
ef f ect
e c o n o mi e s .
t wo
di f f e r
of
Wh e n
wh e r e
t he
in
c ur r e nt
No t e
1.
312
year
ar e
t he
R t i me s
pr i c e s
of
t he
t he
ba s e
s a me
f ai r l y
af t er
f i r st
ef f ect
f i nd
t ha t
we
pa i d
t he
por t i on
we
bundl e
( 2)
c ur r e nt
a v e r a ge
of
f or
t he
ot h e r
year
ar e
E t i me s
t he
t hi s
t he
ne x t
f a mi l i a r
a dj us t e d
c r i t e r i on
The
on
t he
ha v e
pa r t ,
t hos e
pr i c e s
ar e
b e c ome s
by
c os t
t he
t ot a l
s um of
as
t hi s
pr i c e s
its
be e n
year
l ess)
s e c t i on
is
l ast
bot h
year
year ,
t ha n
t he
f or
one
f or
be e n
If
f or
l ast
t he n
ha s
pa r t s .
but
c os t
year ,
v a l ue s
a dj us t e d,
l ast
E,
not ,
por t i on
t he
t he
ot he r
s a me
f or
c or r e s ponds
t he
to
r e l a t i ons hi p
a nd
t he
a c t ua l
For
a ny
gi v e n
t he
s e c t i on
pr i c e s
a ppr oa c h.
as
t hos e
t o wh i c h
us e d
t he
at
c o mmu n i t y ,
t he
t wo
por t i ons
pr i c e
i nde x .
pr i c e s
wh i c h
t he
pr i c e
My
i nde x
can
t he
wh i c h
s um of
s hown
is
t ha t
a ppl i e d
i nde x
c o mp u t e
qua nt i t i e s
t he
t he
of
c hoos i ng
ba s k e t
t he
is
pr i c e
t he
wh i c h
a ga i n
is
t he
i nde x
we r e
pe r c e nt a ge
ha v e
ba s k e t .
it.
e mp h a s i s
to
in
t e r ms
f or
f r o m t hi s
qua nt i t y
The
t he s e
be
i nde x
c o mp u t e
in
c r i t e r i on
i nc l ude d
t hi s
us e d
i nde x
e x c l ude d
it
to
di s c us s e s
pr i c e
b e t we e n
de f i ne
t hi s
s a t i s i f i e d,
qua nt i t i e s
t hi s
a nd
qua nt i t i e s
r e l a t i ons hi p
is
s how how t h e s e
a na l y z e
ba s k e t "
qua nt i t i e s
t hi r d
wi l l
a bov e .
wi l l
t ha t
c r i t e r i on
t he
I
a l ge br a i c a l l y ,
" ma r k e t
pr i c e
as
t hi s
( or
s e c t i on
t he
f or
year
R t i me s
f or
pr i c e s
c r i t e r i on
ba s k e t
t hi s
ba s e
is
a nd
pr i c e s
f i r st
e x pr e s s e d
s a me
t he
mor e
t he
di f f e r e nc e s
pa r t
af t er
a ma r k e t
s a me
t he
c o mmo d i t y ,
year
pr i c e
each
s a me
t he
The
i nde x
in
year ,
goods .
sat i si f i es
Whe n
ba s e
t he
each
t hi s
t he
pa i d
of
In
t he
f or
pa r t
f or
we
be
( 3)
mu l t i p l y i n g
of
e l i mi n a t e d
can
t he
c o mmo d i t y
a nd
bot h
in
obv i ous .
t he
t he
each
year ,
in
If,
of
of
t hos e
on
bought
t he
3 13
v al ues
f or
ac t ual
s um.
f or
bo t h y e a r s
c o mp u t e
of
t hi s
my
and
and
j udge
to
i ndex
al s o
be d i s c u s s e d .
a n u me r i c
e x a mp l e
i mp l i c a t i o n s
ev al uat es
t he
i ndex
i n t e r ms
wi 1 ! be
s h o wn
t hat
It
of
ot her s ,
bot h
one
t es t
t hi s
Pr i c e
Th e
s houl d
i ndex
wh e t h e r
to
of
how
i n t e r ms
it
is
t he
Fi s h e r
c r uc i al
be
k ept
i n mi n d ,
t o anot her
bel i ev e
it
is
c or r ec t
or
f or
ef f ec t
Al l
i ncor r ec t .
c ur r ent
If
i nc or r ec t .
of
t he
i ndi c es
f al l
c at egor y .
I ndex
equat i ons
b e l o w,
i n an a l g e b r a i c
t he pr i c e
i ndex .
t he
v al ues
f o r m wh i c h
of
I
pi
qi
i
I I
pi
i
«I
i
pi
i
i
+
t wo
c l ar i f i es
Let ,
<■}
is
i ndex
t he
We
it
an
v al ues
b e t we e n
if
I
t he
i ndex
h o we v e r .
r epr es ent at i v e.
is
s o me
" ma t h e ma t i c a l
di f f er enc e
be s u p e r i o r
of
t hi s
or
t o adj us t
ex pr es s ed
(2 )
appr opr i at e
its
r eas onabl e
f ai l s
I n t he
0)
t o t hi s
t r ac e
i n t e r ms
pr i c e di f f er enc es
Th e
and
be equal
t he we i g h t s
wi l l
gi v e
r eas onabl enes s .
l ogi c al ,
pos s i bl e
i nt o
i ndex
c r i t er i a.
h i g h ma r k s
c ur r ent l y
t he
i ndex ,
wi l l
b e t we e n
wi l l
s ect i on
us ed
c r i t er i a
mo r e
a pr i c e
s ec t i on
t hi s
f i nal
c ur r ent l y
t es t s "
i ndex
e x a mp l e .
Th e
get s
and
f our t h
to
t he
Th e d i f f e r e n c e s
a quant i t y
Th e
in
e c o n o mi e s
ar e
t h e me a n i n g
of
314
RE = E
wh e r e
( pi '
Th e
and
+
/ E
/2
= p
')
pi
def i ni t i on
q ? pj
1
p . c an
of
•
i
be o b t a i n e d
by
addi ng
=
( qi
VHl
+
Rq?)
p
J ,
f
=
Pi
Th e
( q 1 p 1 + REq ° P° )
i i
i i
def i ni t i ons
1
q. ,
f or
( q 1 + Rq ° ) •
i
i
/
p.
11
and
11 1
p.
ar e
f o l 1o ws :
1
qi
( pi ’
-
( Pi
pi> ■
-
qi
<p !
q!
Rq?
1
qi
Rq ?
+ Rp?
1
=
p.
+
I
pi
-
I
( 6)
+
l
5
11
Pi
(p!
q, 1 Rq ”
«1
( 5)
Pi ) ’
-
pi >
qi
( 4)
eqs .
( 2) .
q 1 p 1 + REq V
VI
i i
( 3)
„0 0
qi pi
Pi " =
pi
+ Ep°
'
I
Pi
r _0
Ep i
5
-
EP° )
l
,
obt ai ned
as
( 1)
315
For
al l
c o mmo d i t i e s eqs.
( 1) a nd ( 2) a r e ,
( a)
( b)
....
,
.
.
I I
i
1
q. P. J E q. p.
H■£ ( q . - q . ) p .
i
i
l 1
( 7)
£
( 8)
£ RE q° p°
i
; £
i
q ! p 111 ■£ ( Rq° i
'
( 7)
+
Any
t wo
wi t h
( 8)
$
= £
v a l ue
of
e qua l
to
of
R,
The
be
t he
of
( 8a)
of
E is
p.
I
a l ge br a i c a l l y
a nd
de f i ne d.
if
1
)
I
i nde x ,
( 7b)
E ar e
'
2q
I
qua nt i t y
onl y
'.
i
Rq. -
e x pr e s s e d
pr i c e s
how R and
t ha t
+
1
c an
p
o
: +£ ( q
1 1
i n d e x , u n k n o wn .
r e ga r dl e s s
I
2q p
a ggr e ga t e s
t he
'
q '.)
i
a nd
( 8b)
The
d e f i ne d
of
E,
ar e
t he
wa y ,
pr i c e
i de nt i c a l ,
v a l ue
as
t hi s
of
( 7a)
is
f ol l ows :
Rq •
q?
( 9)
Rq ?
E=
q 1 Rq°
i
i
q 1 Rq°
i
i
Thi s
is
e v i de nt
a nd
( 6) .
L o o k i ng
( 8a)
ar e
v a l ue
of
at
( 7b)
q i
r
t he
i de nt i c a l ,
I
( 10)
f r om t he
is
de f i ni t i ons
qua nt i t y
i nde x ,
r e ga r dl e s s
qua nt i t i e s
E ar e
of
( 8b)
if
t ha t
( qi p-
+
REq° P° )
(
q!
*
Rq°
( qj pj
+
REq ? P? )
Rq.
pi
how R a nd
to
(
t he
p a nd
of
e qua l
=
of
)
)
onl y
i n eqs.
( 5)
of
a nd
( 7a)
de f i ne d.
R is
de f i ne d
The
as:
3 16
Th e
of
t he
t hi s
pr i c e
i ndex
h a r mo n i c
y ear
i ndex
def i ned
t o t he
bas e y e a r
pr i c es
of
we i g h t
( t he
By
as
( 8b) ,
t he
s a me
Th i s
f or
mu s t
in
any
pr i c e
i ndex
be a t t r i b u t e d
ar e
and
( 8a)
t hat
of
eq.
( 9)
ar e
( 8b)
( 10)
if
of
and
t hi s
( 2) ,
ar e
b e t we e n
t o t he
ar e
t he
Th e
quant i t y
c o mp a r e d
av er age
gi ven
i nt o
t he
t wo
i mp l i c a t i o n s
Wh e n
f or
but
f or
s a me
of
par t s ,
t he
pr i c e
por t i on,
in
( 7a)
( 7a)
and
( 8a) ,
t han
wh i c h
def i ned
di f f er enc es ,
pr i c e
i ndex
( 7b)
t he ot he r
l es s )
t he one
t he
one
( or
pr i c e
c os t
Rq°
out put
c o mmo d i t y
( 9) ,
t han
,
t he
RE) .
r ev eal ed.
mo r e
of
t h e we i g h t e d
by
i dent i c al ,
ot her
qi
y ear ' s
at
eac h
f r o m eq.
c ost
v al ue di f f er enc e
of
adj us t ed
ar e
r at i o
bas e y e a r . 3
w. her e b o t h y e a r s
i ndex
pr i c es
t he
i n t he
v al ued
v al ue
( 1)
quant i t i es
I n t e r ms
eq.
( eqs )
t he
c os t
v al ue
is
t he
as
t he qu an t i t i es ,
s out put ,
di f f er ent l y
quant i t i es
to
its
t he
quant i t y
def i ned
and
as
of
t wo y e a r s ,
di v i di ng
and
to
bas e y e a r
def i ned
i ndex
is
t he
be d e f i n e d
av er age
c o mp a r e d
is
c an
por t i on,
in
( 8a) .
oc cur s
i n eq.
s i nc e
( 9) ,
t he
i dent i c al .
of
t he
quant i t y
i n de x ,
i dent i c al .
The
onl y
quant i t y
if
t he
( i n wh i c h
RE i s
equal
c as e
to
v al ue
E mu s t
t he
t he
of
quant i t i es
( 7b)
i ndex
is
is
def i ned
be d e f i n e d
r at i o
of
£ q!
t he
in
s a me
/£
as
ac c or di ng
ac c or di ng
pi
( 7a)
q°
to
p° ) .
3.
Eq u a t i o n ( 9) u s es h a l f t he h a r mo n i c a v e r a g e as
q u a n t i t y we i g h t s .
Ob v i o u s l y , mu l t i p l y i n g t h e d e n o mi n a t o r
a n d n u me r a t o r by 2 d o e s n o t c h a n g e t he i ndex .
Fo r p u r p o s e s
o f e x p l a i n i n g t he me a n i n g o f t h e i n d e x , h a l f t he h a r mo n i c
a v e r a g e i s mo r e c o n v e n i e n t .
t he
3 17
If
any
ot her
quant i t y
i ndex
be l a r g e r
( or
s ma l l e r )
v al ue
not
be a t t r i b u t e d
c an
pr i c es
in
It
i nt o
and
wo u l d ,
t wo
par t s
( 7b)
of
ot her
ar e
to
t han
( 8b)
be a d d i t i v e ,
c o mmo d i t y
mu s t
p! .
An y
f o r mu l a t i o n
eac h
t he
par t ,
t wo
( 7a)
+
par t s ,
to
( 8b)
of
bo t h
f or
Th e
ar r i v ed
we
par t s
l i k e wi s e
nex t
at
not
( 7a)
and
get
is
t he
p'.
i n t e r ms
to
t he
v al ues
If
t he
t wo
p r i c e of
ii
111
par t s ,
( p. + p^
)/2
i n adj us t i ng
t wo
E q?
get
quant i t y
s a me
as
1/ 2
pr i c es
add
of
,
addi ng
f or
t he
p.
of
To
as
i ndex
t hat
t he
par t s .
ex pr es s ed
we
Th e
t he
t he
eac h
( 7b) ,
t he
t he
s epar at e
bot h
s u m of
.
s i nc e
in
av er age
r es ul t
ar e
to
wi l l
di f f er enc e
r esul t s.
f or
wo u l d
t her ef or e
s ec t i on
Th i s
( 7b) ,
s ame.
s a me
t he
t hi s
pr i c e
t he
( 8a)
E Rq°
( 8b) .
di f f er ent
t he
f or
Ad d i n g
( 8a) .
it
but
v a l u e of
t o a pr i c e di f f er enc e,
h o we v e r ,
eac h
of
of
t he
be p o s s i b l e
wi t h
be
us ed,
t hat
ar e
c our s e,
par t s ,
ot her
is
eac h
s um
par t ,
and
i ndex .
s h o ws
of
how t hi s
t h e mo r e
s a me
f a mi l i a r
pr i c e
i ndex
" ma r k e t
c an
be
bas k et "
appr oac h.
Th e
Ch o i c e
Wh e n
of
we
y ear s
ago,
t wi c e
as
we
mu c h
a " Ma r k e t
s ay
t hat
pr i c es
gener al l y
t oday
quant i t i es
pur c has ed
" adj us t ed"
v al ue
t hi s
we
y ear ,
Ba s k e t " .
is
as
me a n
t oday
t hat
t en y e a r s
t en y e a r s
c o mp a r e d
i mp l i c i t l y
to
a s s u me
ar e d o ub l e
a c er t ai n
ago.
ago
Wh e n
is
t hos e
ma r k e t
t he
doubl ed,
t he
v al ue
t hat
t he
of
t he
t en
bas k et
v al ue
and
pr i c e
of
of
c os t s
t ne
t hi s
pur c has es
r el at i ons hi p
318
f or
t hes e
to
c o mp u t e
quant i t i es
t he
al gebr ai c al l y
s u m of
t wo
f r om t h e
( 11)
of
pi
= i
1 qi
f or
pi
f or
t wo
and
wh i c h
4 0 % of
c o mp o n e n t s
Th e
(q
!
as
f or
t he
a s s u mp t i o n
c an
t he
of
t hos e
pi
of
z
v al ues
quant i t i es
us ed
be a n a l y z e d
eac h y e ar
i ncl uded
and
t hos e
qi )
pi )
,
p
K 1 -
e p?
+
( Rq? -
! / 2
q°
P°
1
/ Z
q.
p°
E = E q.
pi
i ncl uded
i n t he
z qi
q-
we r e
$1
+
p° = 2 ( qn-
v al ues .
e x a mp l e ,
goods
ex pr es s i ng
RE = Z q!
c o mp o n e n t
t hes e
s a me
Th i s
c o mp o n e n t s ,
wh e r e
Th e
by
RE E q°
( 12)
i ndex .
t he
as
t he
ex c l uded
i ndex .
q|
r
is
p{
Bo t h
Ep?
/
ex c l uded
p|
f or
ago
is
s a me ,
=
40%,
4 0 % of
( a s s u mi n g
f r o m t he
di agr am bel ow i l l us t r at es
i ndex
t hi s .
ar e
9
t h e c o mmo n
quant i t i es
t he
q{
pur c has ed
t en y e a r s
t he
ar e
z
i ndex
q' j j
and
t he
e l e me n t
c os t
by d e f i n i t i o n .
and
E = 2,
$2 t o d a y
t he
no t
If,
t he
we r e
quant i t i es
negat i v e) .
of
s a me
pur c has ed
i n t he
3 19
2
Th e
of
eac h
s haded
of
al t er i ng
t he
t he
r epr es ent .
qi
ar ea
t wo
v al ue
i n t he d i a g r a m r e p r es en t s
" c oi ns "
of
t he
wi l l
be $5
ex c hange
wh i c h
c an
" c oi ns "
or
l es s
and
t hat
ex c hange.
If
t he
ef f ec t
pi
is
t he
s a me
and
i ndex
wi l l
Ep°
as
be
f or
t he
t hos e
s a me
wi l l ,
t hat
be e x c h a n g e d
por t i on
wi t h o u t
t he q u a n t i t i e s
of
of
f or
qi
as
Rq°
t he
t he
i nc l uded,
f or
h o we v e r ,
t hey
t he v a l u e
I
of t he i n d i v i d u a l
c o mmo d i t i e s .
I f , f o r e x a mp l e ,
q
c os t s
i
$5 mo r e at pi t h a n at Ep° , a f t e r t h e e x c h a n g e t h e v a l u e of
qi
Th i s
RE i q ” p°
pi
$5 mo r e
t han
bef or e
pr i c e di f f er enc e
quant i t i es
t he
f or
c hange
pr i c e
Rq ° .
b e t we e n
ex c l uded
pai d
af t er
t he
f r o m t he
t he
ex c hange
320
Al g e b r a i c a l l y
( 13)
( qj
-
t hi s
q j ) Pj
c ondi t i on
+
i s,
EP?)
K-
= ( Rq?
-
q -j )
qj
Gi v e n
t hi s
t he
equat i on
P-i
and
anot her
v al ued
pr i c e
at
in
equat i on
pi
one
we c an
por t i on
por t i on
in
t he
bot h
of
Ep?.
s ame.
s i de
f or
t he
equat i ons ,
r i ght - hand
be t he
at
s ol v e
and
q?
On l y
and
if
t he
Rq°
= 1
Rq?
qj
qi
( 14)
+
Rq ?
l;
Rq ?
qi
Rq ?
+ Rq?
t he
l i k e wi s e
Th u s ,
" «I
q^ .
( qj
In
quant i t i es
i i
(
+
pj )
Rq°
c ondi t i on,
of
Ep°
bot h
ar e
s a me
f or
l ef t - hand
s i des
v al ued
at
por t i on
is
Ep?,
s i de
of
wi l l
t hi s
t he
321
( The
is
r eader
obt ai ned
Us i n g
E,
c an
is
by
s at i s f y
h i ms e l f
equat i ng
t he
t he q u a n t i t i e s
def i ned
t hat
por t i ons
i n eq.
( q{
"
Th e r e
and
t hos e
ni
s a me
n
ar e
pr i c e
„
o
i n t he ma r k e t
)
bas k et
of
t oday
on e d o l l a r
Las pey r e
us ed
t he
us ed
and
i ndex
( and wo u l d
not
pr i c e
r el at i ons hi p
not
appl y
t o my
t hat
t he
t he
i ndex .
pr i c e
i ndex
is
t he
pur c has ed
at
eac h
Th e
t hi s
and
al gebr ai c al l y
def i ned
as
t he
f or
of
i nc l uded
i ndex
we r e
f or
Th e
us ual
obj ec t i on
t hat
t he
quant i t i es
at
and
t he
t he
i ndex
pur c has ed
bot h
bec aus e
s ec ond,
t hat
pr i c e
of
c o mmo d i t i e s )
of
pr i c e
( 9) .
s et s
t wo
dol l ar s
of
t he c h a n g e
t her ef or e
c r uc i al ,
in
does
di f f er enc e
quant i t i es
quant i t i es
to
i nc l uded
in
ac t ual l y
pr i c e.
quant i t i es
y ear
Th e
as
ago.
pur c has ed
r el at i ons hi p
s a me
t he
pur c has ed
b e t we e n
t hi s
i n eq.
t he q u a n t i t i e s
i ndi c es ,
not
be
b e t we e n
ac t ual l y
ot her
we r e
def i ned
t o c o mp u t e
t en y e a r s
t he
is
al r eady
Fi r s t ,
t he q u a n t i t i e s
Pa a s c h e ,
pr i c es
i ndex
us ed.
a por t i on
f or
i ndex ,
T
t wo d i f f e r e n c e s
c ur r ent l y
and
pr i c e
)
Rq°
qj + Rq?
t he
Ep° . )
at
)
, q i R..q.i
is
t he
s ol ut i on
as:
E
Th i s
s a me
v al ued
( 14) ,
( qj Rq?
( 15)
t hi s
ac t ual l y
pur c has ed
f or
t wo
dol l ar s
one d o l l a r
t en y e a r s
ago
ar e
ex pr es s ed
i n eqs .
r at i o
( 16)
of
and
( 17) .
( 1 6 a ) ' and
Th e
( 17a) .
pr i c e
i ndex
Ac c o r d i n g
to
is
t hi s
3 22
pr i c e
i
£ q^ c an
i ndex ,
and
at
pr i c es
Th e
pr i c e
p i / E i n eq.
i ndex
is
t her ef or e
is
t he
s a me
be v a l u e d
of
t he
as
( 16)
s a me
t hat
at
( 1 7a ) ,
of
t hat
( 16a)
£
«
£
07)
£
W
q.
p
1
to
£
£
q i Pi
£
It
i n t he
c ur r ent
wh e n £
Wh e n
t he
y ear
«1
+
( qi
£
( Rq?-
u n k n o wn ,
wh i c h ,
i n t ur n,
-
q- )
I
pi
qi )
p?
( b )- - £
1
+
_ 1 ,
£
is
pr i c es
i ndex ,
wh e n
y ear
q^
of
c al l
is
wi l l
,
l
( qi
-
( Rq° -
v al ued
t he
it
be t he
s a me
at
pr i c es
of
hav e
b e en
t he
bas e y e a r
E ,
v al ued
a l wa y s
t he
at
t he
pr i c e
Rq?
n 1 x
P; i +
Rq°
q? + <
of
pr i c es
I
q|
is
v al ues
± L _
s houl d
y ear
pr i c e
£
Rq ° p / E
£
i
+
i
~i
( 19)
t hei r
( b)
i
+
i
•
EP?
*1
( 19) ,
r
( a)
( 18)
to
wh i c h
( 16a)
( 17a) .
n r
i
■
+
!
1
i n eq.
c hangi ng
( 17) ,
( 18)
P°
£
Rq ?P?
to
of
n r r
( 16)
wi t h o u t
c o mp a r e d
as
Ep?
pr i c es
E ' Pi
as
t he
in
ot her
adj us t ed
c o mmo d i t y
of
t he
i
t he ot her
bas e
y e ar .
by
f or
y ear
any
eac h
is
323
No w
if
we
hav e
bas e y e ar ' s
to
be t he
c os t
For
t he
of
r ai s e
pr i c es
s ame,
bas e y e ar ' s
Th e
to
i n or der
t hen
pr i c es .
I
pr i c es
is
t hen
oe t he
in
bas e y ear .
L i k e wi s e ,
s a me
if
t he
f or
Th e
t her ef or e
In
it
c os t
is
i mp o r t a n t
e x a mp l e we
at
y ear ' s
pr i c es .
t he
adj us t ed
by
quant i t i es
adj us t ed
t he
t hi s
by
c ur r ent
to
c an
i ndex
pr i c es ,
k e ep
t hi s
s t at e
Ho we v e r
and
t he
Ep
t he
t hi s
wh e n
if
Ep<
e
l o we r
y ear ' s
out put .
t han
I
of
t hen
l es s
r es ul t s
y ear
in
t he
pr i c es .
be t h e
and
or
r ai s ed
by
an y
t he
t hi s
t he
i n t he
l
E ,
t hi s
ot her
Pa a s c h e
y ear ' s
at
t he
i ndex ,
i ndex ,
ma r k e t
bas e
bas e y e a r ' s
we mu s t
t he c u r r e n t
be
p r i c es .
c os t s
bas e y ear ,
pi .
- E p° )
adj us t ed
of
t he
T
mu s t
wi l l
y ear
For
its
v al ue
Ep a r e
q.
c ur r ent
y ear
c os t
t he
i n t he
I
of
2 q ^ ( pi
Las pey r es ,
is
t he
bot h y e ar s
E1 t her ef or e
if
pur c has ed
t hat
and
i n mi n d .
t hat
pr i c es
t han
c ur r ent
a Pa a s c h e ,
l o we r
ar e
bot h y ear s
l o we r e d
t he
of
y ear
of
t h an
y ear ' s
Ep,
t hi s
pr i c es
is
pr i c es
bot h y e a r s , s
t han
bas e y e ar
l o we r
in
hi gher
Eq!
i nt er pr et i ng
bas k et
is
of
and
l o we r t h a n
I
c a s e wh e n e v e r E > E.
hi gher
pr i c e
pr i c es bei ng
I
i f E < E t he
bas e y ear .
ar e
Th e
pr i c es
pr i c es
t he
s a me
at TEq. . ( E^ p . - p i ) mo r e
bas e y e ar
t he
Th i s
v al ued
t he
f or
y ear ' s
E^ p^ i s
to
y ear ' s
t hi s
> 0
Eq, ^.
t hi s
t he
c onc l ude
ba s e y e a r
pr i c es
us ed
out put
t hat
f or
pr i c es
t o v al ue
324
Th e
We i g h t s
It
of
is
t he
gener al l y
a quant i t y
i ndex
t he
c o mmo d i t i e s
and
Las pey r e
i ndi c es
of
c o mmo d i t i e s
y ear .
For
bas e y e ar
wi l l
v al ue
t he
wi l l
r e ma i n
i mp o r t a n c e
of
t he
( 20)
z
as
t he
my
t hi s
i
i ndex
or
For
y ear ,
t he
t he
y ear
and
but
wi l l
obv i ous .
t ot al
v al ue
v al ue
in
bas e
t he
c ur r ent
i ndex
of
Pa a s c h e
12% i n t he
t he
Las pey r e
c o mp u t e
f ai r l y
t he
per c ent age
l o we r e d ,
t he
is
10% of
to
i mp o r t a n c e
Th a t
r es pec t
is
us ed
r el at i ve
i ndex .
c ur r ent
c ur r ent
i ndex ,
t he a c t u al
i n t he
Th e
s ame.
t he
pr i c es
y ear
t he r e l a t i v e
be c h a n g e d ,
but
not
t hat
b a s e y e ar .
For
t han
of
i n t he
be r a i s e d
t he
in
c o mmo d i t y
Pa a s c h e
t he
i n t he
f ai l
of
t hat
r ef l ec t
i nc l uded
t he
al l
agr eed
s houl d
As s u me
I ndex
Qu a n t i t y
ot her
per c ent age
oo
q P
1 i
, 0
z
s u m of
t he
d i a g r a m b e l o w,
d e t e r mi n e s
t he
i
r at i o
of
r at i o
anot her
i
+
£ <!,• p|
£
v al ues
ac t ual
is
how c l os e
quant i t y
i
i s x % mo r e
it
i s x % l es s
0
'
i
i
q p
0
qi pi
it
of
i n one y ear ,
q1 p
per c ent age
s um f or
v al ue
v al ue
Al g e b r a i c a l l y
y ear .
qi pi
of
t he
per c ent age
I I
0 P
l l
I I
t hi s
if
one
t he
i n t he
As
dat a.
s u m of
t he
t he q u a n t i t y
c o mmo d i t y ,
c o mmo d i t y ,
j.
wi l l
be
ar e
wi l l
c o mp a r e d
t he
s h o wn
per c ent age
i ndex
k,
i ndex
v al ues
be t o
to
in
t he
s a me
t he
wh i c h
t he
quant i t y
325
v
I
1 1
= z q i p 1-
REEq ° p °
326
Th e
G6
is
angl e
d e t e r mi n e d
s hi p
b e t we e n
c hange,
t he
t ai ned.
t he
ar e
obt ai ned
Th e
of
is
by
t o t he
r ef er s
r at i o
pr i c es ,
not
Wh e n
mo n e y
t hi s
br ead
t he
l as t
u s ed
y ear
r ef er s
t hos e
is
onl y
in
br ead
doubl e
to
t hat
bot h y e a r s .
p.
r esul t s
one
of
t he
s u m of
k.
v ° / V° )
ac t ual
i ndex
pr i c es
s at i s f y
t wo
p . as
r ef l ec t
t he
of
wh i c h
in
angl es
be ma i n
quant i t y
t he
r el at i on
wh e n
eq.
t e r ms
on
def i ned
eac h
( 10) .
i n de x
c annot
r eas on
is
t hat
c o mmo d i t i e s
bought
in
bo t h y e a r s
to
at
of
t hos e
onl y
quant i t i es
one
of
t he
t hi s
y ear
quant i t y
r at i o,
2: 1,
r ef er s
t hat
of
por t i on
Two
t wo y e a r s .
l as t
of
y ear ,
Wh e n
t he
t he mo n e y
dol l ar s
t oday
at
wh e r e a s
bot h
p r i c es .
bought
t he
a quant i t y
bought
br ead
in
( 3) .
i mp o r t a n c e
i n eq.
a quant i t y
( 20)
i n eq.
t he r e l a t i v e
def i ned
wi l l
Th e
bought
t he
t he
t he
mu s t
+
t he
addi ng
we i g h t s
onl y
quant i t y
f or
and
i ndex .
t he
y ear ,
at
t he we i g h t s
pr i c e
r ef er s
in
pr i c es
t her ef or e
of
t o al l
a pr i c e
of
is
anal y s i s
be a p p l i e d
Th i s
wh o s e
c o mmo d i t y
Th i s
t hat
n o r ma l i z i n g
i ndex
( v j ^ / V1
t he
wh e n
r at i o
s um f or
wh e r e a s
f or
br a,
t he
t hi s
we i g h t
Th e
is
to
c o mmo d i t y
its
equat i on.
quant i t y
r at i o
to
to
c / a,
I n or der
wh i c h
v ° / V° ) :
eac h
r at i o
be ma i n t a i n e d
equal
j
+
s at i s f i ed.
t he
eac h
is
of
( v i / V1
of
to
t he
c / b.
c / a: c / b,
br a
be equal
( 20)
of
of
by
r at i o
angl es
v al ues
Th e we i g h t
eq.
t he
r at i o
=
t her ef or e
by
r at i o
Th e
br a
d e t e r mi n e d
t hes e
per c ent age
s i de
9 is
is
doubl e
t o al l
t he
t he
pr i c e
of
pr i c e
r at i o
2: 1,
wh i c h
was
a r e wo r t h
s pent
t he
br ead
on
s a me
as
32 7
on e
dol l ar
l as t
y ear
per i ods .
y ear
t han
l as t ,
t he do l l ar s
qi
RQ?
wo u l d
hav e
We wo u l d ,
f or
of
t he
t her ef or e,
s t r uct ur al
ot her
t he
as
p..
t hi s
y ear
:
,
Pf
I q?
.
pur c has ed
t he
Ep° ,
at
c ost
and
=
f or
l as t
pr i c e
of
f or
t hi s
al l
in
br ead
br ead
t hi s
t hi s
c o mmo d i t i e s
y ear ' s
t he
r at i o
of
of
had
its
y ear .
pr i c es
br ead
br ead
c o mmo d i t i e s ,
y ear
l as t
br ead
pr i c e
bot h
and
been. . . : .
pr i c e
l as t
y ear
p -,
( wh e r e , £ q i
pi
=
).
Th e
pr i c e
of
br ead
l as t
y ear
t her ef or e
is
ac t ual l y
hav e
t wo
r at i os .
q?
t
ot her
br ead
mo r e
" ex t r a"
b e t we e n
r at i o
p^ / E
c o mmo d i t i e s
c o mmo d i t y
pi
bot h
t he
f or
s h o wn
har mc f i i c
v al ued
in
to
As
f or
t o adj us t
t he
on
r at i o
E.
eac h
adj us t i ng
s pent
hav e
If
s pent
r el at i v el y
s pent
and
p?
pr i c e. r at i o
appl i es
bought
is
be e n
pr i c e
t o ot her
For
Th e
t he
mo n e y
di f f er enc e
be p ^ E
wo u l d
Z qi
P?
we
c o mmo d i t i e s .
s a me
y ear
if
t hi s
t i me
-
But
if
:
we
p°
, wh i c h
e c o n o mi e s ,
quant i t y
R ( qi
-
and
Rq°
or
Rq°
t he
me a n
of
t he
quant i t i es
Ep°
is
equal
t he
( 2)
t he
wh e n
v al ued
adj us t ed
pr i c e,
p^ .
at
its
-
qi
t he
quant i t y
p^ / E
( or
p.
of
p^ )
wh i c h
o n e e c o n o my
af t er
i
).
b e t we e n
wh e n
v al ued
( 1)
wh e n
b e t we e n
own
to
i n onl y
s u m of
quant i t y
t he d i f f e r e n c e
quant i t y
:
di f f er enc e
to
s ma l l e r
p.
pur c has ed
b e l o w,
of
appl i es
pr i c e
t he
at
v al ue
pi
and
at
pi
t he c os t
of
t he
and
at
t he
and
t he
wh e n
t he d i f f e r e n c e
v al ued
pr i c e
of
b e t we e n
at
r e ma i n i n g
s t r uc t ur al l y
328
Let
qI/
(q?
l
1
+ Rq?)
l '
2qX
qi
= X,
( P;
1
=
e p »)
-
( y q? + x
Co mp u t a t i o n
and
of
f o l l o wi n g
quant i t y
i ndi c es
i mp l i c a t i o n s .
and
by
R.
It
der i v e
t he
Fr oi n e q u a t i o n
pr oc es s ,
(
21
( pi
-
Ep ?
is
Ep?)
),
n u me r i c
ar e
c al c ul at ed
eas i es t
pr i c e
( 10)
e x a mp l e
i ndex
R c an
I
Rq ? ) ( p * -
+ y ( q| -
= RqP ( pi - EpQ) * ( c p fPr i c e and Qu a n t i t y I n d e x ?
t he
I n t he
R,
Rq?)
+ Rq?
- Rq? ( pf Th e
+ y EP?
xpi
- X
Rq?)
1
s how how t he
and
t r ac e
t o c o mp u t e
t he
by d i v i d i n g
be c a l c u l a t e d
t he
by
pr i c e
s o me of
quant i t y
v al ue
an
( pi 1
t he
i n de x ,
r at i o
i t er at i v e
wh e r e ,
)
Rq ?
Th e
bas i c
R i n Ta b l e
II.
( q i Pi
dat a ar e
+
REq ° p ° )
Rq ?
=2
q‘
s h o wn
i n Ta b l e
I,
t he
+ Rq?
( q 1p 1
i i
c al c ul at i on
of
Ep?)
p. )
1
.
T ABL E
Cu r r e n t
De f e n s e
Ex p e n d i t u r es
I
Bá s e
Ye a r
% Va l u e
Va l u e
Pr i c e
Qu a n t i t y
1 Va l u e
Ye a r
Qu a n t i t y
Pr i c e
Va l u e
Ma n p o we r
10
18
180
60
10
3
30
30
Ha r d wa r e
20
3
60
20
5
8
40
40
Oper .
30
2
60
20
10
3
30
30
& Mai nt .
100
300
Tot al
TABL E
Co mp u t a t i o n
(. 2)
( 1)
De f e n s e
Ex p e n d i t u r es
% Va l u e
Cu r r e n t
+ Ba s e
qí
X ( 1)
of
II
Qu a n t i t y
. ( 3)
( 4)
( 2)
+ q°
q*
I n dex
( 5)
*
O)
r
]
( 7)
( P)
(2 ) * (6 )
q°
x
Ma n p o we r
90
900
20
45
18. 79
28. 79
31 . 25
Ha r d wa r e
60
1 , 200
25
48
9. 3 9
29. 39
40. 82
Oper .
50
1 , 500
40
37. 5
18. 79
48. 79
30. 77
& Mai nt .
( 8)
R2 x q?
Ma n p o we r
Ha r d wa r e
Oper .
102. 84
130. 5
Tot al
& Ma i n t
19. 9
9. 95
19. 9
( 9)
qj
+ R2 q°
( 2)
( 9)
r>3
0
R x q.
q*
+ R3 q°
( 2)
T ( 12)
29. 9
30. 1
20
30
30
29. 95
40. 1
10
30
40
30. 05
20
50
30
49. 9
100. 25
Tot al
R1 = 1 3 0 . 5 / 6 9 . 5 = 1 8 7 . 9 %;
*
( 13)
( 12)
( I D
( 10)
R 2 = 102. 84/ 97. H
x 187. 9
100
R = 2
E = 1. 5
1 9 9 % ; R3 = 100. 25/ 99. , 7 5 X 199 = 200%
co
ro
330
Ta b l e
II
is
Add
( 1)
t he
c ur r ent
+
( 3)
Th e
s um of
t he
f i r st
t he
( 4)
instead
Co mp u t e
Th e
by
q?
of
di v i ded
to
a c o mp u t e r ,
t he
,
t he
t he
=
qi pi
100
t o obt ai n
( qi
qi
/
+ q?
) ( qi pi
+
r
J
t he
and
t he
s u m of
( 4) ,
gi v es
quant i t y
i ndex ,
R1 ,
( s h o wn
repeat
steps
(3).
and
(4),
using
.
by
of
R,
and
qi
+
Rq°
= 100.
E,
is
t he
r at i o
t he
t hat
Las pey r e
t hi s
A pr es ent s
ba s e y e a r
and
of
R t i me s
t he
( R = 2)
I
200 mi n u s
by
i n de x ,
t han
t he
by
II).
q?
t o c o mp u t e
wi t h
and
c at egor y .
n e w a p p r o x i ma t i o n
pr i c e
III
bas e y e a r
c at egor y
t o obt ai n
Ta b l e
be a d mi t t e d
Ta b l e
t he
t o obt ai n
eac h
eac h
di v i ded
It
of
f or
( 3)
y ear
ai d
q?
f or
c ur r ent
mu s t
c at egor y
a p p r o x i ma t i o n
R^q°
( 2)
of
p° ) .
M ultiply
( 7)
by
b o t t o m of
unt i l
v al ues
c al c ul at i ons :
where
q°
( 2)
(5)
( 6)
f o l l o wi n g
REq ° p “ ) .
and
Di v i d e
REq°
eac h
( 1)
+
qj
Add
t he
RE q ° P °
( qj pj
( 4)
at
f or
Mu l t i p l y
<l j
on
per c ent age
y ear
9 j Pi
( 2)
bas ed
v al ue
t hi s
or
of
i n de x
Pa a s c h e
di s adv ant age
t he
quant i t i es
s a me
by
of
t he
t he
is
t he
s t ep
v al ue
( 5) ,
of
t he
b a s e y e ar .
mo r e
i ndi c es .
l abor i ous
Ho we v e r ,
wi t h
di s appear s .
i n f o r ma t i o n
mu l t i p l i e d
p r i c e mu l t i p l i e d
r epeat
by
as
Ta b l e
t he q u a n t i t y
pr i c e
i ndex
I,
i ndex
( E = 1. 5)
331
Ta bl e
t he
III
B i s one
s a me qua nt i t i e s
pr i c e s
as at
i s t he ot he r
por t i on of
c os t
1. 5 t i mes
t he
t he
por t i on of
Cu r r e nt
De f e ns e
Expendí t ur es
Qua nt i t y
same
t ot al
III
pr i ce.
Qua nt i t y
Va l ue
18
180
20
Ha r dwa r e
20
3
60
10
Oper .
30
2
60
20
at
t he c ur r e nt
Ta bl e
III
C
x 2
Year
Adj us t e d
Pr i c e
1, . 5
Va l ue
90
4. 5
120
12
90
4. 5
300
300
Tot al
Ta bl e
Cur r e nt
De f e ns e
Ex pe ndi t ur e s
Qua nt i t y
III
B
Rase
Y ear
Pr i ce
Va l ue
Pr i ce
4. 5
6 2/ 3
18
1 20
6 2/ 3
Ha r dwa r e
6 2/ 3
3
20
6 2/ 3
2
24
& Mai nt , . 12
Ta bl e
Cur r e nt
Ma npowe r
Qua nt i t y
3 1/ 3
Ha r dwa r e
13
Oper .
18
& Mai nt .
12
4. 5
12
1/ 3
III
Ba s e Year
Va l ue
Qua nt i t y
Pr i ce
1/ 3
4. 5
18
60
3
40
3 1/ 3
36
8
2
136
Va l ue
30
80
54
C
Year
Pr i ce
Adi us t e d
164
164
Tot al
De f e ns e
Ex pe ndi t ur e s
Year
Qua nt i t y
Ma npowe r
Tot al
a mount
______ Base
10
Oper .
por t i on whe r e
A
Ma npowe r
& Mai nt .
t he
A.
Year ________
Pr i c e
A,
base y e a r
III
Ta bl e
III
13
12
4. 5
Ad. i ust ed
Va l ue
60
40
36
136
332
Fr om T a b l e
III
wh i c h
pur c ha s e d
we r e
c ur r e nt
in
t he
year
ba s e
we r e
year
pr i c e s ) .
year
B is
The
ar e
t he
s a me
III
L i k e wi s e ,
ar e
year
( Ta bl e
t he
is
s hown
as
s a me
III
of
III
as
C)
t he s e
i n Ta bl e
III
t he
f or
in
$164
t he
t he
f or
in
year
pur c ha s e d
t he
year
$300
$136
( Ta bl e
in
t he
t he
ba s e
ba s e
( Ta bl e
at
year
c ur r e nt
t he
ba s e
a dj us t e d,
ba s e
t he
in
f or
c ur r e nt
whe n
in
$136
t he
$300,
a c t ua l
$300
pur c ha s e d
in
III
t he s e
B) .
pr i c e s ,
D.
Ta bl e
Cu r r e n t
De f e n s e
Ex p e n d i t u r e s
at
pl us
qua nt i t i e s ,
$300
$200
f or
in
of
2 / 3 % of
pur c ha s e d
$164
qua nt i t i e s
54
pur c ha s e d
qua nt i t i e s
t hos e
s a me
f or
pur c ha s e d
C)
a nd
t he
2/ 3% ( 164/ 300)
2 / 3 % of
t hos e
t he
t ha t
pur c ha s e d
54
( Ta bl e
t he
v a l ue s
al so
54
qua nt i t i e s
year
year
e v i de nt
f or
( or
c ur r e nt
B) .
it
III
D
I VC + Ba s e
. Qu a n t i t y
Pr i c e
I VB
Ba s e
Va l u e
I VC + Cu r r e n t
I VB
Qu a n t i t y
Pr i c e
Va l ue
Ma n p o we r
10
9
90
20
9
180
Ha r d wa r e
20
6
1 20
10
6
60
Ope r .
30
3
90
20
3
60
& Ma i nt .
T o 't a ^
300
Fr om T a b l e
c ur r e nt ,
III
pl us
year ,
pl us
r ef er
In
to
D it
$164,
$136,
t he
t he
is
e v i de nt
ba s e
year ,
ba s e y e a r ,
t ha t
is
whe n
f o l l o wi n g d i s c u s s i o n
a d j u s t e d da t a .
300
t he
r eal
t he
s a me
s pe nt
f or
t he
v a l ue
as
of
$164,
t he
t e r m ba s e
$136
c ur r e nt
r e s pe c t i v e
year
wi l l
333
qua nt i t i e s
a nd
in
t he
t ot a l
t he
ba s e
s a me ,
it
v a l ue s
year
in
Ta bl e
Ev a l u a t i o n
of
t he
t e r ms
of
t hr e e
wh e t h e r
t he
di v i de
we r e
by
pr i c e
bot h
t he
s a me
The
t he
s e c ond
qua nt i t i e s
t he
i nde x
i nt o
pr i c e
is
t wo
ma r k e t
of
t hi s
to
wh i c h
i nc l ude d
t he s e
t he
f or
t he
in
pr i c e s
v a l ue s
to
I
t he
is
pr i c e
we r e
of
t he
c ur r e nt
year
pr i c e
i nde x
wa s
we r e
pi / E
pr i c e
wa s
t he
ef f ect s
t hi s
t he
a nd
t he
pr i c e
i nde x ,
t he
f or
,
p°
t hos e
wi t h o u t
r e l a t i ons hi p
is
s ubs t i t ut e d
is
t he
v a l ue d
f or
in
t he
f or
pr i c e
us e d
wa s
a v e r a ge
mu l t i p l i e d
f or
be
wh i c h
t he
For
can
c ha ngi ng
t he
wh e n
at
e i t he r
f or
t he
s a me
t hi s
a ggr e ga t e s
e x c l ude d
Ep°
we r e
e qua t i on: . ( 9 ) .
mu s t
to
s a me
a c t ua l
t he
r e l a t i ons hi p
i nde x .
pr i c e s
to
qua nt i t i e s
s e pa r a t i ng
a nd
wa s
i de nt i c a l
as
i nde x
qua nt i t i e s
I
we r e
we r e
pr i c e
of
wh o s e
pr i c e s
de f i ne d
one ,
t est
pa r t s ,
pr i c e
by
in
The
i de nt i c a l
t he
a
t he
a ppl i e d
i nde x
ba s i c
pa r t
t he s e
c a l c ul a t e
t he
a nd
year
t ha t
f or
t he
t wo
one
of
c a l c ul a t e
in
The
i nt o
ba s e
i nc l ude d
to
a nd
i nde x
$164
c o mp a r e d .
i nde x
t est ed
t hos e
s e c t or .
pur c ha s e d
s a me .
e l i mi n a t e s
pr i c e s
c r i t e r i on
,
i de nt i c a l
f or
of
f i r st ,
v a l ue s
r e l a t i ons hi p
pi
ar e
qua nt i t i e s
a na l y s e d
The
pr i c e
i nc l ude d
I
Wh e n t he
t ot a l
us e d
year
t he
a ggr e ga t e s
t he
us e d
pa r t s ,
qua nt i t i e s
s t i t ut e d
t ot a l
a ppl i e d.
ba s k e t
A ar e
i nde x
s a me .
if
t he
v a l ue s
s e c t i ons
t he
The
onl y
c ur r e nt
pa i d
I nde x
i nde x ,
year s.
pr i c e s
Si n c e
r eal
III
pr i c e
of
t he
t he
cr i t er i a.
t he
each
pr i c e s
a ny
on
The
s a me .
t he
f or e goi ng
di f f e r e nc e s
as
a nd
in
t he
Ta bl e .
t he
year
ba s e
t est
to
t he
t ha t
In
in
in
f o l l o ws
t he
An
s h o wn
f r o m t he
t he
be
s ub
t he
v a l ue
qua nt i t i e s
t he
s e c t or
pr i c e s .
one s
f or
Wh e n
t he
334
s e c t or
i nc l uded
c o mmo d i t y
i n t he q u a n t i t y
i n t he c u r r e n t
bas e y ear .
Thus
y ear
t he pr i c e
f or
t he
t he
i ndex was
a p pl i e d,
was
v al ued at
t he ad j u s t e d
pr i c e
was
i ndex was
i ndex ,
v al ued
at
i ndex
when
pr i c es
c o mmodi t y .
v al ue of
i ndex
v a l u es
r ef l ec t
v al ues
a c o mmo d i t y
pr opos ed
i n c l ud e
I r v i ng
pr opor t i onal i t y ,
t es t s .
t he
t he i ndex
I he
of
y ear .
t hi s
i ndex
Thi s
s ec t or
I
us ed
t o c o mp u t e
i mp o r t a n c e of
r e du c e d
y ear .
c hos en
it
i nc r eas ed
The s um of
t he s ame.
eac h
t he p e r c e n t a g e
It
it
by t he
t he p e r c e n t a g e
i s t hi s
s um of
t he
t he r e l a t i v e
i mp o r t a n c e of
di f f er ent
f r om t hos e
hav e s u gg es t e d
t o j u dg e
t he a d v a n t a g e s
of
Fi s h er
mor e t han f i f t y y e a r s
v ar i ou s
t es t s
ago.
Thes e
c o mme n s u r a b i 1 i t y , d e t e r mi n a t e n e s s ,
t i me r e v e r s al ,
ar e not
wor k s
wh e t h e r
I
us ed ar e t he ma t h e ma t i c a l
pr i c e d i f f e r e n c e s
ques t i on
i n t he
wi d e l y
Th es e t es t s
wh e t h e r
of
us ed
t he i dent i t y ,
5
t o whi c h
i n t he i ndex .
The mos t
by
t he o t he r
t he pr i c es
wh i c h d e t e r mi n e s
ar e c o mmo n l y
i ndi c es .
i n c l ud ed
t he s ame when
t hat
r e ma i n e d
Ther e ar e c r i t e r i a ,
wh i c h
t he q u a n t i t i e s
i n one y ear ,
i n t he o t he r
bot h y e a r s
per c ent age
c hos en
t he r e l a t i v e
a gi v en c o mmo d i t y
f or
t he q u a n t i t i e s
pr i c es .
Wh i l e t he pr i c es
s ame p e r c e n t a g e
its
eac h
i n t he
f or
of
pr i c e of
pr i c e
t he s e c t o r
The t hi r d c r i t e r i o n was
t he q u a n t i t y
f or
t hat
r e ma i n e d
i t s own
t he
E t i mes
was
t he s ame as
i n t ur n,
i ndex ,
t he
( i . e.
f ac t or
r e v e r s al ,
c o n c e r n e d wi t h t he qu e s t i o n of
wh e t h e r
it
on t he v al ues )
i ndex
and c i r c u l a r i t y
behav es
e l i mi n a t e s
but
r a t h er
i n a l ogi c al
t he e f f e c t
wi t h
t he
f as hi on.
5 For a d e s c r i p t i o n of t hes e t es t s , s ee I r v i ng Fi s her ,
Mak i ng of I ndex Number s , Ho u g h t o n Mi f f l i n, Bos t on 1922.
335
For
e x a mp l e ,
t he
t i me
r ev er s al
t oday
ar e do ubl e
t hos e
y ear s
ago
be h a l f
My
s houl d
i ndex
ex c ept i on
par t
and
one
f ac t or
f o r mu l a
f or
t he
wi t h
i n pl ac e
pr i c e
and
pu t
As
i n v i e w of
of
and a pr i c e.
us e
t he
f or
s a me
f o r mu l a
c o mp u t i n g
L i k e wi s e ,
if
pur c has ed
i n t wo
( qi
us e
is
+
q ?) / 2-
a we i g h t e d
no r e a s o n ,
s houl d
s t at es
y ear s
of
t hat
ago,
if
pr i c es
wh i l e
of
f o r mu l a
t we n t y
wh i c h
c al c ul at e
t he
ago,
y ear s
me e t s
eac h
i n dex .
quant i t i es
wo u l d
s houl d
and
t hi s
a s i mp l e
i ndex
t he
y ear
t hat
as
quant i t i es
Th e r e
q° >s a me
t hos e
a g o we r e
pr i c es
t hi s
mu s t
t hi s
t es t
For
my
mu s t
= E* / I I x
us e
i ndex ,
be t he we i g h t e d
f o r mu l a
t es t ,
t en y e a r s
( E* / I I I
av er age
+
pr i c es
ago
i ndex .
wh i c h
of
t en
doubl e
be f o u r
t hos e
t i me s
E* J l I I ) .
t he
t he
we
we
c i r c ul ar i t y
y ear
to
t hat
a quant i t y
doubl e
nat ur e
h o we v e r ,
t he
f or
ar e
t he
s e e ms
t h e m up) .
we
q?p° ) / q*
be t he
t est
addi ng
pr i c es ,
t he
quant i t i es
pr i c es
av er age
us e
s ec ond
obj ec t
i n t he
t o a s s u me
t hi s
t en
o n e mi n o r
t hat
b e t we e n
t he
( i . e. ,
av er age
c onc er ns
of
t he
s t at es
c er t ai nl y
c o mp u t i n g
a pr i c e
r es er v at i on
t we n t y y e a r s
t hos e
t he
f or
is
quant i t i es
{ ( q *p * +
t her ef or e,
wi t h
i ndi c es
We wo u l d
t he
av er age
be u s ed
My
For
t es t s
ex c ept i on
t he d i f f e r e n c e
per i ods ,
pr i c es
pr i c es
di s c us s ed,
i nt er es t ed
if
t he
wh i c h
of
quant i t i es
t i me
.
t es t s ,
f or
t he
we a r e
Th e
al r eady
t hat
t o da y .
quant i t y
i nappr opr i at e
us i ng
ago,
Fi s h e r ' s
i n pl ac e
pr i c es .
a quant i t y
of
r ev er s al
pr i c es
of
al l
of
r es er v at i on.
t he
s t at es
t en y e a r s
t hos e
s at i s f i es
of
s a me,
of
t es t
An y
s a me we i g h t s
pr i c es
av er age
us ed
pr i c es
to
t o v al ue
of
al l
of
336
of
t he
aggr egat es
wo u l d
s har e
e x a mp l e ,
t hi s
For
wo u l d
of
ot her
and
f or
Ge r ma n y ,
c o mp a r i s o n
Br i t a i n ,
not
Th o u g h
to
to
t he
Wh i l e
t hi s
i n de x ,
not
t es t
t han
but
r eas onabl e.
So me
t hi s
of
j udgi ng
ev en
wh i l e
it
and
of
if
Fr a n c e
U. S. / So v i e t
in
wo u l d
t hough
f o r me r
t he
l at t er
s e e ms
U.
of
f or
c o mp a r i s o n
be
does .
equal l y
S.
by o u r
s c ope
t he
t he
eac h
US d e f e n s e
r el at i ons hi p
bi nar y
i n de x
c o mp a r i s o n s
Br i t a i n ,
wa n t
pr i c e
So v i e t
one
to
of
not
l ogi c al ,
dec i s i on
r at her
Un i o n ,
one
r el ev ant
bi nar y
t o c o mp a r e
t es t
i n our
a bi nar y
wa y
of
be a l t e r e d
is
our
a s et
t he
The
b e t we e n
s eem r eas on abl e.
i ndex ,
by
appear
I t al y ,
dev ot i on
r es ul t s
l ogi c al
def ens e
dec i s i on
to
i nc l ude
i nt er es t .
we wi s h
wh e t h e r
s houl d
not
i ndex
is
to
s uc h
u s e a mu l t i
an
i ndex
be d i c t a t e d
i s mo r e
by
a
t es t .
an
Th i s
is
not
f or
r ej ec t i ng
an
t he
i mp l i c a t i o n s
to
s ee wh e t h e r
a bas i s
f or
i ndex
if
of
i ndex
my
it
t he
c hoos i ng
s e e ms
un
ar e
bel ow.
( 1)
t he
ma y
be us ed.
we wo u l d
an
ex pendi t ur es ,
wo u l d
So v i e t
Ge r ma n y .
s houl d
An o t h e r
by
t he
t he c i r c u l a r i t y
s ay
appr opr i at e
s l av i s h
and
c o mp a r i s o n
ex c l ude,
l i s t ed
of
i nf l uenc ed
t es t
ex pendi t ur es
an
we wi s h e d
s uc h
i n me a s u r i n g
def ens e
i ndex
t he mu l t i n a t i o n a l
me e t
t hi s
nat i onal
be
Fr a n c e
pr ef er abl e
wo r l d
h o we v e r ,
e x a mp l e ,
pur pos es ,
i nt er es t ed
If
be p r e f e r a b l e .
t hos e
s o me
we we r e
t ot al
pur pos es ,
to
or
t he
For
mu l t i n a t i o n a l
ex pendi t ur es
t hat
If
be a p p r o p r i a t e .
c ount r y ' s
does
i nc l uded.
Wh e n
t he
quant i t y
quant i t i es
i ndex
and
t he
in
t he
pr i c es
bas e y e a r
by
t he
a r e mu l t i p l i e d
pr i c e
i n dex ,
337
t he
By
r eal
v al ue
r eal
t he
3/ 10
v al ue
of
v al ue
I
v al ue
r eal
of
t he
of
eac h y e ar ' s
me a n ,
of
i
t ot al
eac h
f or
t hi s
e x a mp l e ,
y ear
v a l u e of
is
hal f
t hat
of
q?
Th e
*
Rq°
r eader
( 2)
pr i c es
wi l l
Wh e n
of
.0
r ec ogni z e
t hi s
bot h y e ar s
ar e
to
t he c os t
of
Z
■
i
;
wh e r e
p’
i
( 3)
pr i c e
t he
=
q ! P;
{
Th e
i ndi c es
r e ma i n i n g
( q. p!
as
has
REq °
+ REq ? P? )
f or
t he
us ed
bot h.
Rq°
= 7,
c o mmo d i t i e s ,
is
t he
r eal
eq.
p°
/
adj us t ed,
t he
pr i c e
of
ZRq ^ p !
.
( Pi
+ RPi )
)
t he
1 1
v al ues
av er age
each y ear
in
Th u s ,
=
c an
t he
of
out put .
v al ues
1 1
( 21) .
been
to
( q 1 P 1 + REq ° p ° )
+ Rq" M
?
t o c al c ul at e
t ot al
di f f er enc es
of
bot h y e ar s
Rq<
eac h y ear ' s
f o r mu l a s
to
al l
t hat
= 3 and
7' 1
,
equal
Z
qi
) , -s
11
r es pec t
qi pi
0
bas e y e ar
ha l f
b o t h wh e n ,
11
t he
if
For
REq ° p °
+
is
c o mp a r e d
i.
I
_ Ü _ _ _ ( q I pI
out put
t he q u a n t i t y
al s o
of
be u s e d
t he
and
t o ex pl ai n
i ndi v i dual
c o mp o n e n t s .
q| pi
( 4)
-
REq ° P°
Th e we i g h t s
r epr es ent at i v e
6 Th i s
ci t .
pp.
= {
of
poi nt
199- 200.
us ed
t he
is
2ql ( pi -
t wo
to
Ep?
)
c al c ul at e
e c o n o mi e s
di s c us s ed
}
i n my
+ {
t he
P n- ( q{
"
i ndi c es
c o mp a r e d .
pr ev i ous
If
> •
ar c
2qi
ar t i c l e,
is
op.
338
l es s
xl
t han
r educ es
{
t he
(P-j
age
"
v al ue
t ur n
qi
,
Pj )
r es ul t s ,
out
to
to
e c o n o mi c
I
s uc h
t he
ef f ec t
of
ot her
pr ov i des
mo r e
c ul at i on
of
t hat
of
t he
f o r mu l a s
it
i ndex
( wh e r e
i nc r eas es
is
t he
" e c o n o mi c "
t wo
I
t he
us ed
in
per c ent
t her ef or e
t e r ms
" e c o n o mi c "
t heor y ,
aggr egat es
s uc n
of
its
and
t he
a pr i c e
wh i c h
as
i ndex
ar e e q u a l
c o n s u me r
i mp o r t a n c e
pr oduc t i on
c an
me a n i n g .
s houl d
ac c or di ng
s at i s f ac t i on
pr i c e
e c o n o mi c
ot her
c o mp a r i n g
pot ent i al
di f f er enc es .
on
t he
di f f er enc es
and
is
e c o n o mi c
on
to
on
f or
c o mp a r i s o n s ,
wh. er eas
d i c t a t e ' wh i c h
ot her
wo u l d
t he
e c o n o mi e s
i ndi c es
wo u l d
we wi s h
' appr oac h
s i mp l y
is
e c o n o mi e s ,
by
f i r st
t hen
t ne
ad
t he
f r o m t he
v al ues " ,
i mp r o v e
di f f er enc es .
v al ues
of
" adj us t ed
l i kel y
t he
Se p a r a t i n g
v al ues
c hanges
al l
t he
of
be f a c i l i t a t e d
di f f er enc es
s t at i s t i c al
di f f er ent
or
i n f o r ma t i o n
c o mp a r i s o n
of
t he
f or
pr i c e
pr i c e
s t r uc t ur es
y)
an
c r i t er i on,
t hes e
s a me wa y
Th e
t he
v al ues
t he
t he
by y
=
b e t we e n
c o mp a r i s o n s
of
t he
as
j udgi ng
r ec ogni z e
ef f ec t
t he
pi
p!
r eas onabl e.
s at i s f ac t i on
bel i ev e
j us t i ng
qi
If
.
pot ent i al .
Wh i l e
of
of
t he c o s t
c o n s u me r
of
Rq ?
me a n i n g .
Ac c o r d i n g
pr oduc t i on
wel l
di s t i ngui s h
" s t at i s t i c al "
s o me
v al ue
t han
y.
as
wa y
be x % mo r e
( Z qj pj )
be q u i t e
He r e we mu s t
I
*
}
q ° Ep ° b y
of
A f i nal
to
wi l l
per c ent age
Th e
c o mp a r e
it
Th e
t he
cal
ef f ec t
be me a s u r e d
pur pos e
v ar i ant s
of
i n t he
t o me a s u r e .
bas ed
r epr es ent
on
t he
pr opos i t i on
di f f er ent
me a s u r e s .
or
339
If
we wa n t
c os t
to
k n o w wh a t
t en y e a r
i ndex
gi v es
t he mi x
us
Bu t
t en y e a r s
of
on
af t er
al l ,
is
It
f or
t hi s
t hes e
us ual
t he
v ar i at i ons
is
t hey
don' t
t hi s
me a s u r e .
of
do
we
Th e
It
pr i c e
d o es
is
i mp o r t a n t
di f f er enc es
not
s u m of
me a n
bot h
of
hav e
been
t hat
t hei r
par t s .
Th i s
My
t hat
I
i ndex
t he one
to
adj us t
c o mp a r e d
t he
to
pr i c e
e l i mi n a t e d ?
hav e
Th i s ,
a pr i c e
us ed
t hes e
a t t e mp t e d
is
i ndex .
to
c ons t r uc t ed
ot her
s how
to
I ndi c es
wh e n
e l i mi n a t e d
ef f ec t
c an
of
of
1.
Two
t o not e
is
be e n
is
i ndex
c ons t r uc t i ng
Wh a t
Pa a s c h e
i ndex
it
hav e
c o mp a r i s o n
h a v e mi s t a k e n l y
t he j ob.
Ad d i t i y i t y
c ost
ef f ec t
hav e
t hem.
No t e
t he
a pr i c e
of
wo u l d
t oday , t he
wh e n
t he
wi l l
t hat
def ens e
Las pey r e
so t hat
pur pos e
pur pos e
is
t o us e
v al ues
or
pr ov i de
ag o ,
of
c os t
it
aggr egat e
i ndi c es
t h at
If
aggr egat e
t he
mi x
its
we wa n t
anot her
di f f er enc es
is
if
one
to
a n s we r .
wh a t
v a l u e of
t he v a l u e
c o mp a r e d
t he
bought
t o us e.
t he
ago
t oday ' s
has
t he
ef f ec t
i n eac h
b e en
of
par t ,
e l i mi n a t e d
be i l l u s t r a t e d
by
t he
it
f or
t he
a s i mp l e
e x a mp l e .
Su p p o s e
of
t hei r
s hoppi ng
r es pec t i v e
pay
t he
l oc al
s a me
di f f er ,
but
I n t he
l oc al
t he
t her e
pr i c es
ar e
i n one
s t or es .
pr i c es ,
t hey
t wo
pay
s t or es
di f f er ,
s hopper s ,
bot h
s u p e r ma r k e t
I n t he
an d
of
t he
quant i t i es
of
t he
s a me
a mo u n t
t hey
buy
pay
t ot al
t he
t he
s o me
r es t
t hei r
s u p e r ma r k e t ,
t he
t hey
wh o m do
s a me
s a me
t he
wh e r e
goods
f or
at
t hey
t hes e
quant i t i es ,
t ot al
t hey
a mo u n t .
pur c has e
goods .
and,
t hough
De s p i t e
340
t he
f ac t
t hat
bot h
at
t he
hi gher
by
one
s hopper
by
t he
ot her
s e e mi n g
s pend
pr i c ed
ar e
l oc al
c an
s pent
at
l oc al
is
t hei r
pur c has i ng
A and
s hopper s
at
t he
out
t wo
B ar e
s t or es
t he
pur c has es
b e t we e n
t he
s u p e r ma r k e t
For
t he
not
and
c o mmo d i t y
at
Qu a n t i t y
Pr i c e
i
5
8
J
5
40
t hos e
f or
t hos e
and
t he
p r o b l e m.
s pent
--
b e t we e n
di f f er enc es
v al ues
on t he
pr i c e
s t or es
f or
pr i c e
t hi s
dol l ar s
di f f er enc e
pr i c e
pai d
c a nc el
di f f er enc e
eac h
pai d
at
t he
I
Su p e r ma r k e t
A
Co mmo d i t y
Tot al
Sh o p p e r
Va l u e
B
Qu a n t i t y
Pr i c e
Va l u e
40
25
8
200
200
1
40
40
240
Pu r c h a s e s
at
240
Loc al
St o r e s
i
5
10
50
5
20
1 00
j
1
1 50
1 50
1
100
100
To t al
200
Tot al
Tot al
l oc al
on
t he a v e r a g e
TABL E
Sh o Do e r
al s o
t he
i,
Pu r c h a s e s
ef f ec t
but
f r anc s
t he
pai d
addi t i v i t y
wi t h
pr i c e
to
pr i c es
t han
f a mi l i a r
addi ng
mo n e y
ex pl anat i on
s u p e r ma r k e t
onl y
( wh o s e
t her e)
Th e
Th e
t hei r
av er age
I.)
as
of
c o mmo d i t y
i n t he
s a me
due,
t he
eac h
di f f er s .
f or
c o mmo d i t y .
at
t he
p o we r
l oc al
f or
be f o u n d
t he d o l l a r s
s t or e
pr opor t i on
( See Ta b l e
Ad d i n g
t he
s a me
s t or es ,
hi gher
s hopper .
par adox
t he
i
10
J
6
9
581/ 3
200
Pu r c h a s e s
90
30
10
300
350
2
70
140
440
440
341
t wo
l oc a l
s t or e s
For
c o mmo d i t y
is
j
it
15,
is
l ess
125,
t ha n
mo r e
doubl e
t ha n
t he
t hr e e
s u p e r ma r k e t
t i me s
t he
pr i c e .
s u p e r ma r k e t
price.
Wh a t
t ot a l
of
a c c ount s
pur c ha s e s
hi s
l oc a l
t ot a l
s t or e
in
t he
at
pr i c e
t he
b e t we e n
i
a nd
t ha n
por t i on
f or
of
a
B.
a v e r a ge
A a nd
s ma l l e r
Thi s
t he
B is
pr i c e
t ha t
por t i on
di f f e r e nc e
t ot a l
To
pr i c e s
is
is
de a l
of
de f i ne d
i ne v i t a bl e ,
wi t h
t he
to
t wo
be
t hi s
t he
s i nc e
s a me
of
t he
f or
of
a
a
l a r ge r
t ot a l
t wo
f or
j
c o mmo d i t y
t he
c a nnot
e qua l
di s c r e pa nc y
pr i c e
pa r t s .
of
at
t he
por t i on
t he
e c o n o mi e s
n
a v e r a ge
bot h
hi s
b e t we e n
q / Rq
i
1
p r o b l e m of
pa r t s ,
A buy s
qua nt i t i e s
1
p.
1
di f f e r e nc e
each
pur c ha s e d
i t
q /q
i
i
b e t we e n
unl e s s
t he
c o mmo d i t y
. 342
APPENDI X I I I - A
GUIDELINES FOR ADJUSTMENT OF NEW AUTOMOBILE PRI CES
FOR CHANGES IN QUALITY OP PRODUCT!/
Introduction
This paper describes and defines the concepts end procedures followed by
the U.S. Bureau of Labor Statistics in adjusting quoted prices of new automo
biles for changes in quality in connection with compilation of the official
price indexes.
The purposes are (1) to specify the basic information needed
to make the adjustments,
(2) to indicate how these data will be used, and
(3) to aid users of the price indexes in interpreting them.
(Note:
Special
attention is being given to changes resulting from or related to the Federal
Safety Standards.)
The basic concept of quality in an automobile is the same as that for
any other product, i.e. utility to the user.
It usually is thought of in
terms of reliability, durability, convenience, safety, economy, speed, accel
eration, carrying capacity, maneuverability, comfort, appearance, prestige,
etc.
Many of these characteristics, in turn, are not susceptible to precise,
direct measurement; but most of them are related to physical characteristics of
the automobile which can be described specifically.
Therefore, the BLS specifies the quality of an automobile in terms of its
physical characteristics, and examines significant changes in those characterwith respect to their effects on quality.
When examination shows that
343
a significant quality change has taken place (either improvement or deteri
oration) the problem then becomes one of determining the value of the change,
in order to adjust quoted prices accordingly.
If the feature involved in the change were available separately, then
the market would establish its value.
Unfortunately,
this situation exists
only with respect to optional equipment items, and not for the myriad struc
tural and other changes which are incorporated into the automobile and ’'ecome
an integral part of it.
One important basis for valuing the latter types of
changes is cost marked up to selling price.
Furthermore, the market price
for an optional equipment item cannot be regarded as establishing its value;
unless the item has been installed on a large proportion of automobiles in
response to market demand.
Where installation rates have been low, the same
basis may also be used in part for valuing optional equipment items.
A.
CRITERIA FOR QUALITY CHANGE ADJUSTMENTS
1.
The quality changes for which adjustments will be made include
those structural and engineering changes which affect safety,
reliability, performance, durability,
economy, carrying capacity,
maneuverability, and/or comfort and convenience,
including, but
not limited to:
a.
Changes that affect the safety of occupants of the car,
and/or the safety or healthfulness of the outside environ
ment, whether required by Federal Safety Standards or not;
b.
Engineering changes that affect the possibility or prob
ability of mechanical failure with respect to such features
as braking and steering systems;
344
c.
Changes in mechanical features that affe c t the overall
operation or efficiency of the automobile,
of a component to perform its function,
tion,
steering control,
transmission,
d.
or the abi l i t y
such as, a c c e l e r a
stability, h o r s e p o w e r of the engine,
compression ratio,
carburetor;
Changes in design or materials which affect the length of
service, need for repairs,
improved oil filter,
or strength of the item,
such as
self ad j u s t i n g brakes, weight or
quality of materials used in relation to their function;
e.
Changes that affect comfort or convenience such as re d e
signed seat belts,
foam rubber seat cushions,
folding center arm-rest,
2.
trunk light,
etc.
Changes for which adjustments will not be made are:
a.
Style, or changes in appearance d esigned solely to make
the product seem new or different,
such as trim and c o n f o r
mation, design of radiator grill, etc.,
unless previo u s l y
offered as options and purchased by a large propor ti o n of
customers.
b.
Physical changes in separate components or parts that are new
in design o r constructed of different material,
simplification of component,
such as
s u b s t itution of plastic for metal
in the instrument panel, unless it is a p parent that there has
been a chsnge in the a b i l i t y of the component to p e r f o r m its
345
function, or unless the changes are necessitated by a
significant change in another component.
B.
PRICING AND ADJUSTMENT PROCEDURES
1.
Selection of series:
New series selected for pricing at the
beginning of each model year are those most nearly equivalent
to series priced in the preceding year.
the choice of a specific series.
the same manufacturer.
Four conditions govern
First, it must be produced by
Second, it must have the same body type.
Third, it must be in the same size class (i.e., compact, inter
mediate, or standard).
Fourth, principal features (e.g., location
of engine) must be comparable.
The third condition, which treats the three sizes as three
different items, occasionally presents a problem of identity when
a modification in size, (overall length) shifts the automobile
into another size class.
When this happens, wheelbase length
rather than overall length is used as a criterion for determining
size comparability.
The past history of size changes for models
previously selected fot comparisons is also considered when
selecting the reolacement model.
In some instances, the new model most nearly comparable with
the previously priced model does not represent the current volume
seller in a particular series.
When this occurs, the new volume
• 346
seller may be introduced later in the model year after the changeover
to current year models is completed.
2"
ifeA 5. -to be supplied by automobile manufacturers.
Whenever significant
changes in physical characteristics of automobiles are made (usually
at beginning of model year) they should be reported, including those
yfoych involve lower q u ality , as well as those which cover product
ISPISy^JSgP^•
There are times when lower quality may offset all or part
of the cost of some quality increases.
in a major component is accompanied
Frequently, a significant change
by design changes in other components
which partially offset the cost of the major change.
In order to provide the information needed to evaluate quality
changes, the manufacturers are asked to report, in de t a il, the following
changes in physical characteristics:
a.
Changes resulting from or related to each of the Federal
Safety
Standards, listed separately;
b.
Other significant changes, including changes from optional-at-extracost to standard equipment, and vice versa, except those involving
style or trim (see A. 2. a., above).
3.
Grouping related changes.
Felated changes should be grouped in reports of changed character
istics.
related changes and/or additional parts required to accomodate
the principal change in a component assembly are considered part of the
overall quality charge when the improvement car. be had only in combination.
This procedure provides a better basis for deciding when changes in one
347
component are offset by changes in another.
Redesigned parts n e c e s s i
tated by the principal change in parti c u l a r component m a y result in
savings that offset part of the cost of the principal change.
4.
V aluation of changes
W h e n a change involves installation of some entirely n ew feature
as standard equipment,
its valuation will be based on its estimated
value as defined in 5. a., below.
W h e n it replaces or modifies s o m e
thing that was standard equipment on previous cars in the same or
comparable series,
it will be based on the difference in estimated
value between the new feature and the old one.
When it involves
making standard a feature that previously was optional-at-extra-cost,
its valuation will be based on a combination of option price and
estimated value In a c c o r d a n c e with the p roportion of cars in which
it previously was factory-installed as optional equipment.
5.
Specific data requested
Manufacturers are requested to report the estimated v alue of each
change listed in E. 2., above, based on:
a.
For new features--All direct and indirect costs incurred for m a n u
facture or purchase of components,
a ssembly and installation of
the feature, plus the established company, mark-up to selling
price that is applicable to p a s s e n g e r cars.
This applies to all
items which represent entirely new features installed as standard
equipment;
i,e,, do not replace or m o dify a ny p reviously existing
feature installed in cars in the same o r comparable series;
348
b.
For all items that replace o r m o d i f y some previously-existing
feature on cars in the same or comparable series,--net d i f f e r
ence in value,
5. a. above,
i.e., a f t e r estimating value, as defined in
for both the old and the comparable new feature,
report the net difference;
c.
For items previously optional but n ow made standard--both option
prices and estimated value, as defined in 5. a. above,
plus
percentage of cars on which installed at factory in previous
year.
Also, similar data for items which p reviously were
standard,
6,
but n o w are made optional at extra cost,
Mark-up to retail
In g e n e r a l , especially x^ith respect to structural and engineering
changes,
the reported values will have been marked up to wholesale
prices,
.There associated changes have not been grouped by m a n u f a c
turers in their reports,
they will be so grouped by EL3, and the net
value of all changes in an assembly or component will be used.
The
retail value will be obtained by marking up the wholesale value by
the ratio of the manufacturer's suggested retail delivered price for
the equipped car (including Federal excise tax)
to the price charged
by the manufacturer to the dealer (without Federal excise tax) for the
identical car.
7.
Warranties
Changes in warranties have been accepted by BL3 as representing
changes in value to automobile consumers.
Extensions in either
349
coverage or duration were considered improvements for w h i c h d o wnward
adjustments were made in quoted prices.
ple, any reduction in warranties will
adjustments.
Following the same p r i n c i
be the basis for upward price
Manufacturers are requested to provide details of
w a r ranty changes and the value thereof.
C,
HA N DLING SPECIAL SITUATIONS
Mo guidelines can cover all situations that will arise with respect
to changes in a product as complicated as an automobile.
shown, however,
-Experience has
that certain types of special situations can be a n t i c i
pated, as follows:
1.
Essentially new type of c a r .
Occasionally,
product lines are
changed so radically that it is not feasible to establish c o m
parability of a current model with a n y previous model.
Such
situations will be handled by treating the new model as if it
were an entirely new product;
2.
i.e.,
linking it into the ■*r,'iev.
Changed quality not proportional to estimated v a l u e .
Occasionally,
new technology makes it possible to achi e v e recognizably oetter
quality at no increase in cost, or p o s s i b l y even at lower cost.
Since no satisfactory technique has been developed for p l a c i n g a
value on such a change,
it will be ignored and prices will
be
compared directly.
3.
Inadequate i n f o r m a t i o n .
In some cases, manufacturers do not.find
it feasible to supply adequate information regarding costs involved
350
in a quality change.
If the quality change is minor,
ignored and prices will be compared directly.
it will be
If it is a major,
the LL3 will estimate its value from any pertinent information or
advice available.
351
APPENDI X I I I
-
B
GUIDELINES FOR ADJUSTMENT OF PRICES FOR NEW TRACTORS,
FARM MACHINERY AND EQUIPMENT
..
FOR CHANGES IN QUALITY OF PRODUCT •!/
Introduction
This paper describes and defines the procedures followed by the
U. S. Bureau of Labor Statistics in adjusting quoted prices of
new tractors, farm machinery and equipment (hereafter referred
to as farm machinery) for changes in quality in order to compile
the official price indexes.
The purposes are (l) to specify the
basic information needed to make the adjustments, (2) to indicate
how these data will be used, and (3) to aid users of the price
indexes in interpreting them.
(Note:
Special attention is being
given to changes resulting from or related to tne Federal Standards).
While the basic concept of quality in farm machinery is usefulness
to the user, in pragmatic terms it is currently impossible to
take account in price indexes all factors affecting utility.
These factors are thought of in terms of work performed, reliability,
durability, convenience, safety, economy, and comfort.
Many of
these characteristics are not directly measurable; but most of
them are related to physical characteristics of the farm machine
which can be described specifically.
As a consequence the Bureau
restricts adjustments to those factors which directly modify the
physical characteristics of the product or the conditions of sale.
V
Sour ce:
Di vi si on o f I ndust r i al Pr i ces and Pr i ce I ndexes, Of f i ce
of Pr i ces and Li vi ng Condi t i ons, Bur e au of La bor St at i st i cs,
Januar y 1973.
352
fore, the BLS specifies the quality of a farm machine in terms
of its physical characteristics, and examines significant changes
in those characteristics for their effects on quality.
When
examination shows that a significant quality change has occurred
(either improvement or deterioration), a value must then be placed
on the change in order to adjust quoted prices.
If the features involved in the change were available separately,
the market would establish their value.
The market price for an
optional equipment item can be regarded as establishing its value
when the item has a high installation rate.
Unfortunately, these
values exist only with respect to former optional equipnent, and
not for the many structural and functional changes which are
incorporated into the farm machine.
One important basis for
evaluating the latter type of changes is cost, marked up to sel
ling price.
A.
CRITERIA FOR QUALITY CHANGE ADJUSTMENTS
1.
Quality changes for which adjustments will be made
include those structural and engineering changes
which affect safety, reliability, work produced,
durability, economy, and comfort, including, but
not limited to:
353
a.
Changes in mechanical features that affect the
overall operation or efficiency of the farm
machine or the ability of a component to perform
its function, such as, steering control, stability,
horsepower of the engine, transmission, compression
ratio, carburetor, traction, hydraulic functions.
b.
Changes in design or materials which affect the length
of service, need for repairs, or strength of the item,
such as improved oil and fuel filters, weight or quality
of materials used in relation to their function.
c.
Changes that affect comfort or convenience such as
foam rubber seat cushions, adjustable seat, visibility,
air-conditioning, etc.
d.
Changes in design or materials which reduce the cost
of a component and can be associated with a prior
quality allowance for that component, e.g.— a
tractor roll-over protection originally designed on
short notice— redesigned to save cost but to do
the same job.
2.
Federal. State or Local Regulations:
Special attention should be given those changes required
to meet Federal, State, and/or local regulations.
These
include, but are not limited to, changes necessary to
354
meet Occupational Safety and Health Administration (OSHA)
regulations and Environmental Protection Agency (EPA)
standards at the Federal level and the various State
and local safety and environmental regulations.
Changes made on the specified farm machines which are
required to meet current or future Federal regulations
will be treated as quality improvements.
Specification
changes which are not specified at the Federal level
but which are of the same nature as those being legally
required, including changes made to meet State and/or
local regulations, will be evaluated on their own merits.
That is, physical changes which alter the specification
of the product (not the production process) and affect
the majority of sales for the specified farm machine
will be considered for quality change evaluation.
(A state required safety feature on a farm machine would
not necessarily represent the "majority of sales" unless
the manufacturer sold in that state only.)
3-
Changes for which adjustments will not be made are;
a.
Style, or changes in appearance designed to malrp
ohe product seem new or different, such as trim
and conformation, design of grill, etc., unless
355
previously offered as options and purchased by
large proportion of customers.
b.
Physical changes in separate components or parts
that are new in design or constructed of different
material, such as simplification of component,
substitution of plastic for metal, unless it is
apparent that there has been a change in the ability
of the component to perform its function, unless
the changes are necessitated by a significant change
in another component, or unless the change is
associated with an earlier change in the same
component.
c.
Federal, state or local regulations that affect
safety of employees in the plant or the environment
only, but not the physical specifications of the
products.
B.
PRICING AND ADJUSTMENT PROCEDURES
1.
Selection of series;
New series selected for pricing
when new models are introduced are those most nearly
equivalent to series priced in the preceding year.
(Periodic meetings will be held with representatives
of the industry to review specification and series priced.)
356
Three conditions govern the choice of a specific
series for comparison:
2.
a.
It must perform the same function.
b.
It must be produced by the same manufacturer.
c.
It must be of the same configuration and size class.
Data to be supplied by farm machinery manufacturers:
Whenever significant changes in physical characteristics
of farm machinery are made (usually when a new model is
introduced) they should be reported, including those
which involve lower quality, as well as those which cover
product improvement.
In the case of associated changes,
lower quality of one feature may offset all or part of
the cost of the primary quality increase.
In order to provide the information needed to evaluate
quality changes, the manufacturers are asked to report,
in detail, the following changes in physical characteristics
a.
Changes resulting from or related to each
Federal standard, as specified in A.2. above,
listed separately.
b.
Other significant changes, including changes
from optional-at-extra cost to standard equipment.
Small running changes may be accumulated and
reported annually.
\
357
3.
Grouping of related changes:
Related changes should be grouped in reports of
changed characteristics.
Related changes and
additional parts required to accomodate the principal
change in a component assembly are considered part of
the overall quality change when the improvement can
be gained only in combination.
This procedure provides
a better basis for deciding when changes in one component
are offset by changes in another.
Redesigned parts
necessitated by the principal change in a particular
component may result in savings that offset part of
the cost of the principal change.
U.
Valuation of changes
When a change involves installation of some entirely
new feature as standard equipment, its valuation will
be based on its estimated value as defined in 5.a.>
below.
When it replaces or modifies previously
standard equipment on existing farm machinery in the
same or comparable series, it will be based on the
difference in estimated value between the new feature
and the old one.
When a feature is made standard
that previously was optional at extra cost, or is
made optional but previously was standard, its valuation
358
will be based on a combination of option price and
estimated value in accordance with the proportion
of farm machinery in which the feature previously
was factory-installed as optional equipment (optional
to standard) or the proportion in which it is expected
to be factory-installed as optional equipment(standard
to optional).
5.
Specific value data requested
Manufacturers are requested to report the estimated
value of each change listed as described in B.2.,
above, based on:
a.
New features— value at total factory cost, plus
the established company mark-up to selling price.
This applies to all new features installed as
standard equipment which do not replace or modify
any previously existing installed feature.
b.
For all items which replace or modify a previously
existing feature,— net difference in value, i.e.,
after estimating Value, as defined in 5.a. above,
for both the old and the comparable new feature,
report the net difference.
c.
For items previously optional but now made standard— both
option prices and estimated value, as defined in 5.a.
above, plus percentage of farm machines on whicl
installed at factory in previous year.
For
items previously standard but are now made
optional at extra cost, report the new option
price, estimated value, and estimated installation
rate for the new model.
6.
Warranties
No allowance, will be made for changes in warranties.
Warranty costs are a function of the overall quality
of the product.
As physical quality improvements to
the product are made and adjusted for, in accordance
with these guidelines, the value of the warranty to
the consumer declines.
To avoid double consideration
of quality changes, warranty changes will not be
considered by BLS to have separate quality value.
HANDLING SPECIAL SITUATIONS
No guidelines can cover all situations that will arise
with respect to changes in a product as complicated as
a farm machine.
Experience has shown, however, that
certain types of special situations can be anticipated,
as follows:
1.
Essentially new type of farm machine.
Occasionally,
product lines are changed so radically that it is
not feasible to establish comparability of a current
360
model with any previous model.
Such situations will
be handled by treating the new model as if it were
an entirely new product; and by linking it into
the index, with no price change reflected.
2.
Changed quality not proportional to estimated value.
Occasionally, changes occur that make it possible to
achieve recognizably better quality at no increase in
cost, or possibly even at lower cost.
It is also
possible to produce poorer quality with increased cost.
Since no satisfactory technique has been developed for
placing a value on such quality changes, they will be
ignored and prices will be compared directly.
3.
Inadequate information.
In some cases, manufacturers
do not find it feasible to supply adequate information
regarding costs involved in a quality change.
If the
quality change is minor, it will be ignored nnd prices
will be compared directly.
If it is
major, the BLS
will estimate its value from any pertinent information
or advice available.
4-.
Questions have been raised regarding the inclusion or
exclusion of R & D cost in the value of reported
quality changes.
The Bureau is studying this question.
Until it is resolved, it is expected that companies
will include a reasonable pro rata share of the
R & D applicable to the quality change in question,
and its expected life.
362
APPENDIX III-C
Price and Cost Indexes for the S h i p b uilding Industryi/
Mary E . Lawrence
Before proceeding further w i t h the shi p b u i l d i n g study, w e ne e d a decision
as to whether a price or cost index w o u l d be m o r e useful as a first
effort.
We should also consider some pe r t i n e n t facts a bout the difficulty
of m aking price indexes for the Census 5-digit product classes in this
industry,which would be conceptually comparable to those for other
Industries.
Current Bid Prices
In this industry several concepts of price m i g h t be m e a n i n g f u l in a
given period; one w o u l d be prices b id a n d/or a c cepted in that period.
These are the prices needed for the W PI a n d by the M a r i t i m e Commission,
the Navy, and the industry, generally, w h e r e they are needed for compa r i s o n
w i t h cost data in order to judge the profits currently being taken.
As you
know, the Maritime A d m i n i s t r a t i o n h as told me of their conviction that
prices and costs do n o t move together.
This is confirmed by the M.A. Cost
Study of 1962,2/ viz. the following passage.
• • • it is apparent that the b id price is d etermined by
the shipyard managemen t after co n s i d e r a t i o n of o t h e r factors
equally as v i t a l as the actual estimated cost.
Not the least
of these has b e e n the n e e d for o b t a ining additional contracts
in a n extremely competitive industry w h e r e the amount of
available business is s ufficient to utilize only a por t i o n of
the construction potential.
Submitted da t a and retur n costs
have shown that yards sometimes b id w i t h o u t profit m a r g i n at
less than actual overhead and at times proje c t i n g savings on
multiple vessels contracts that m ay never ma t e r i a l iz e . "
1/
Source:
Division of Industrial Prices and P r i c e Indexes,
Prices and Living Conditions, Bureau of L abor Statistics.
Office of
1 7 " s h ? n v ^ H ° f C° ^ FfiCt0rs E n te r ± n 8 Into Bids for Ship C o n s t ruction in
Shipyards on the Four Coasts of the U n i t e d States (Report to Committee
on Commerce, U.S. Senate), March, 1962.
363
Current Shipments Prices
I assume a price index for ships delivered in a given period would also have
some uses, since they represent the money value of capital being added to
the total stock at that time.
However, these prices reflect cost and demand
conditions of a year or two in the past.
The costs have probably been
escalated by WPI group 10 prices, but the profit element they reflect would
seem to be drastically out of date.
In most industries, production leg or
not, the shipments prices would correspond to the annual and quinquennial
census value of shipments.
But in this industry they do not.
In order to get a value added figure comparable to those for the other
industries, the Census Bureau gets from the shipbuilders an estimate of the
value of a kind of hypothetical product, i.e., the "work done' in the current
year.
The respondents are instructed to compute the value of work done by
including the cost of labor, the cost of purchased materials and parts re
ceived during 1958, overhead and profits by one of the following methods:
(1) estimating the percentage of completion during 1958,
(2) reporting net billings for work done during 1958,
(3) reporting payments received for work done during 1958.
Net billings and payments are supposed to be used only if they correspond
to the work actually done during the year.
These estimates are, in effect, the
value of hypothetical shipments under old and new contracts.
They probably
are a good measure of current materials and labor costs and current overhead,
plus a hodge podge of profit rates representing different periods and pro
rated by methods known only to the companies.
The hypothetical product
represented by this estimate is one that could not be held constant, nor
would it be useful to do so.
It appears to me that neither a current bid
price nor a current shipments price is a suitable deflator for the "value
of work" nor for the "value added" derived from it, because of the different
profit rates involved.
It is possible that a materials-labor-overhead cost
index would do just as well, and, in fact.be less distorting in periods of
drastic change in demand.
In this connection, it is interesting that Mr. Jaszi of O.B.E. inserted into
the record of the P.S.R.C. report hearings a list of priority nonmilitary
prices needed as deflators which included three categories of ship prices
and costs:
(1) Prices for nonpropelled ships.
(2) Costs for ships over 2000 gross tons.
(3) Costs or prices for ships of 2000 gross tons or under.
It is possible to read too much into the request for costs for large ships
and prices for small ones.
It may reflect a belief that small ship prices
are easier to get.
However, I doubt that this is likely.
On the other hand,
small ships do not require quite such a long production cycle, so that their
current prices might be more likely to get into the census data.
364
Price Index Methodology
There seems to be a coisensus that producer goods should be priced either
by the producers' asking price or by pricing their contribution to the
output of the product.
I believe that the latter method is ruled out
because of the obscurity of the output concept.
A ship's output is actually
a service, difficult to define and quantify— especially for military ships.
For some purposes, of course, performance can stand for output.
The criterion
of efficiency here is the same as that applied to aircraft, railroad cars
and motor vehicles, i.e., ratio of the useful load to the total weight.
In
commercial ships this is the deadweight-displacement ratio, which is an
indication of a capacity-speed ratio.
In warships, however, capacity alone
seems to be the most important criterion, since the battle efficiency is
said to increase in direct proportion with the military loads.
One learns
from textbooks on shipbuilding that contracts usually stipulate that the
ship must develop a certain power and operate at a certain efficiency in
developing the power.
The performance is judged in the trial runs and
certified by the official examiner.
Since trial-run data is published, it
would probably be possible to work up a kind of performance index; but this
would be a utility index, not suitable for producers goods.
It hardly seems
practical to study ships' performance over time, and measure the ship's
contribution to performance as opposed to that of personnel and other factors.
'
The producers asking price could be obtained by any method which reflected
cost of materials, services, labor, overhead, and profit, and gave due effect
to changing technology and profit.
At first thought, it seems that actual
bid prices are most suitable for this purpose, provided that cost adjustments
for quality changes can be made with confidence.
As I reported to y ou in my
memorandum of August 28, the Maritime Administration is making an annual
index of this type for their own guidance and using some very arbitrary
adjustments to allow for differences in order sizes and design changes between
models.
I assume that BLS will want to evaluate this index before requesting
shipbuilders to simulate this method.
If the M.A. annual index is judged
to be methodologically sound, I suppose the escalator could be applied 'to
obtain a monthly price series for subsidized ships.
(There is good reason,
as explained below, to believe that the subsidized ships can stand for the
large-ship census product class.)
Another method of getting an estimate of producers' prices would be to have
shipbuilders periodically re-estimate a bid on which they have recently been
successful, as is done for structural steel for buildings and bridges.
This
would provide a good estimated price to the extent that the builders would
take the trouble to reflect changes in technology is their re-bids instead
of inserting new prices in old formulas.
Moreover, it is fair to wonder how
much
reliance could be placed on a profit estimate made without the actual
spur of competition in such a competitive industry.
I cannot personally see
what would be the value of knowing the profits that would be asked for in
hypothetical bids.
What body of value data would they relate to? So far as
I can determine, the only meaningful profit estimates in this industry are
those contained in the actual contracts.
365
Cost Index as Substitute for Price Index
The cost of materials-labor-overhead is, of course, a poor substitute for a
true price index in any industry for the familiar reasons that it does not
reflect productivity changes and, of course, profit. As I mentioned before,
the Maritime Administration is convinced that it is an especially poor
substitute in this industry.
However, they still need such an index for
escalation of contracts and obviously need a better one than WPI group 10.
Moreover, it appears that a cost index might be as good as any other for
deflating the Census values for the product class of large ships.
Mr. Baron attempted this kind of index in 1955. He constructed sub-indexes
for the three materials categories of steel, machinery, and outfitting,
the latter category being a catch-all which includes electrical and piping
systems, deck fittings, joiner work, fixtures, etc.
(These three categories
correspond roughly to the three sections of a bid.) Mr. Baron got a list of
200 items from a cargo ship bid provided by the Maritime Administration.
He related the items to approximately nine WPI product class indexes which
were grouped under the foregoing categories and weighted by the materials
proportions contained in the bid.
The sub-indexes were compared with
similar ones supplied by Bethlehem Shipbuilding for the period 1947-1954
by months.
The steel index was considered a good match with the builders,
but the machinery index was considered unsatisfactory for short range
periods when demand for ship production is changing rapidly.
As would be
expected, the Bethlehem series for engines, pumps, and motors for special
ship use proved more sensitive to changing demand for shipbuilding than did
the BLS series, moving with broader industry demand.
The outfitting index
was judged acceptable, although subject to the same criticisms as the machinery
index. When the two sets of sub-indexes were combined and compared, they
moved very closely together. However, Mr. Baron had computed another
experimental index by combining group 11 with group 10 on a monthly basis,
using equal weights.
This index proved to be an even better match of the Bethlehem consolidated
index, and Mr. Baron was prepared to recommend that it be used in the WPI
to carry the shipbuilding weights and also that it be offered to the M.A. as
a better escalator.
There were plans to approach other shipbuilders about
preparing comparative indexes, but at that point the matter seems to have
been dropped.
The files do not contain an evaluation of the labor series used in the combined
labor-materials series.
They record the industry consensus that labor and
materials costs were currently of approximately equal weight in ship construction
and that, of the several series available, the Ship Building and Repairing
Industry average hourly earnings for production and related workers seemed
best to meet the internal requirements of the WPI. This series seemed to
represent the largest number of reporters, the best national coverage and
was available on a monthly basis, although it somewhat lagged the WPI
production schedule.
366
Mr. Covins has suggested that if we attempt a new cost index, it would be
well to build-up a new sample of items specific to shipbuilding.
This would obviate the need of getting shipyards
to supply comparative
indexes.
If I understood him correctly, he suggested that we could start
the sampling procedure with a textbook list of items.
This sounds like a
proposal to get a cost index to cover the whole industry, rather than
differentiating between military and nonmilitary and large and small ships.
However, since it is likely that a large M.A. cargo ship would adequately
represent the nonmilitary large ship Census product class, I would prefer
to stay within the industry framework and obtain item specification for
such a ship from the Maritime Administration, as Mr. Baron did.
Industry Input Index
It might be interesting to follow one of the P.S.R.C. suggestions that
industry input, as well as output indexes be built up from the same sample
p ces or -digit product classes.
This could presumably be done by
matching a text book list of items to Census 5-digit classification, then
putting the sampling effort into those product classes which do not yet
meet industry index standards.
The Census "cost of materials" weights could
be used.^ The stumbling block here is that 70 percent of the industry cost
of materials is lumped together in the miscellaneous class.
However, this
is typical of all the important manufacturing industries.
If we
intend to build up input indexes corresponding to output indexes weighted
by Census data, the problem should be faced.
I understand from Mr. William
Casper of Census that the large miscellaneous classes almost always result
from the Census secrecy rules.
If we are interested in exploring this method
I suggest that the Census Industry Division Chief be requested to supply a
list of items— not values— contained in the class.
The full census list
ln turn’ be allocated to the 5-digit product classes already selected,
and the values in the miscellaneous class would be allocated for weighting
purposes with the help of the Maritime Administration and/or the industry.
i ^ o u c h t d tofrini eX T°Uld ^ dmi ttedly be crude, but as a single industry index
t ought to rank well with the index which Mr. Baron computed from WPI
groups 10 and 11. And, as you will recall, that index compared very well
with the ship cost index supplied by Bethlehem.
Moreover, I submit that
industii6-!"138^1 ^ ^ °f ihe taSk> thS b6St h °Pe °f getting a full system of
industry input indexes lies m the use of combined 5-digit product class
Selection of Representative Ships for Price Indexes
The Census primary product classes in this industry consist of five broad
categories. The three largest— military, and nonmilitary, self propelled
of wnrk3^ n°nmll^tary.rePair--each accounted for about 30 percent of the value
of work done on all primary products.
The remaining 10 percent was split
between nonpropelled ships (largely barges and dredges); and military repair.
These percentages do not, of course, indicate the relative values of the
product classes in the usual sense because of the nature of the "value of
367
work" estimate.
I have not found any published source of ship values, but
there are two good sources of types and sizes of large ships in production, from
which one can conclude that a cargo ship with turbine propulsion in the
Maritime Administration C-3 or C-4 series would adequately represent the^
large ships in the Census product class of nonmilitary self-propelled ships.
A statistical appendix to the 1963 annual report of the Shipbuilders Council
listed the ships of 1000 gross tone and over remaining under construction
in private yards at the beginning of 1962 (not prepared for the 1964
report). The official classification society, the American Bureau of Shipping,
regularly published statistics in their monthly and annual publications for
ships in the 2000-plus gross tons category.
(These 1000 and 2000 gross ton
classifications appear to derive from a time when they were more meaningful.)
The ABS annual Register tabulates domestic shipyears and their annual delivery
of ships in the over-2000 class. A cursory inspection suggests that about
90 percent of those built since 1960 were Cs-S or Cs-4 cargo ships, weighing
between 9 and 12,000 gross tons.
I have not yet made any investigations of military ships, nonpropelled ships,
or repair.
In 1955, the intention seems to have been to get a cost index
for the Maritime Commission "prototype" C3"i5-DX-l and let it stand for the
whole industry.
Moreover, my informant in the M.A. Estimates Office indicated
that their price index covering all the subsidized ships, regardless of size,
is also used, by the Navy and others.
I assume, however, that we would want
to work within the framework of the industry index program by getting an index
for large nonmilitary ships, and indentifying it as such, leaving the way
open to testing, at least, whether it fits the other product classes.
Conclusion *
3
2
1
I suggest that before experimenting with methodology, we need a clear concept
of the kind of indexes
we would like to have and who would use them.
Some
of the following questions can be settled within the Price Division,and some
require consultation with other divisions and agencies:
1.
Should we try to get a single price and/or cost index to cover the whole
industry? Or should we stay within the framework of the industry index
program and fit indexes to Census 5-digit product classes, beginning with
SIC 37313, "Self-propelled ships, nonmilitary, new construction."
2.
What is the primary purpose of the index?
3.
a.
To carry the shipbuilding weights (or a portion of them) in the WPI?
B.
To be used as deflators of Census data— output or input?
c.
To provide an improved contract escalator for the Maritime Administration?
(I believe that the Navy uses wage series for escalation.)
Would not the best price index for the WPI be based on the most recent
contracts placed, rather than most recent shipments made?
a.
If this kind of index can be obtained, would users of Census output
data use it as a deflator?
368
4.
5.
Would it be reasonable to use the M.A. annual price index, extrapolated
or escalated monthly?
a.
If so, would it stand for the whole industry?
product class?
Or even the whole
b.
If allowed to stand for the self-propelled nonmilitary product class,
would we get the Bureau of Ships to provide a similar index for the
military product class?
(Probably not, if as I am informed, they
use the M.A.'s).
c.
Could we get a similar index for the smaller ships, built by different
producers?
Could the M.A. supply a prototype design for the large ship class and
could we get 2 or 3 of the 10 builders concerned to supply periodic bids?
a.
Would their estimates of profit reflect the true state of demand?
And would that not depend on how much work the individual bidder had
in his yard? Would this not bias the price, unless you had bids from
all the builders?
b.
Would these recurring bids reflect productivity changes?
c.
Would this one prototype serve for the whole industry or should we
also get some from the Navy?
6.
Would it be worthwhile to ask shipbuilders to supply a cost-of-materialsplus-labor style of index to which they have added overhead and profit
estimates?
(I believe they would have to insert as much labor in this
as in an actual re-bid.)7
7.
Is there a true need for a cost-of-materials-pLus labor index to be
supplied by BLS? Or would an industry input index to fit the Census
cost of materials" data be more fitting and useful? The same labor series
are presumably available to other agencies.
369
I n t he cour se of i nvest i gat i ng shi p pr i ces, I hav e l ear ned t hat t he
Mar i t i me Admi ni s t r at i on has been const r uc t i ng an annual shi p pr i c e
i ndex si nce 1957.
The i ndex i s pr epar ed i n t he Di v i s i on of Est i mat es, Of f i ce of Shi p
Const r uct i on.
As I under s t and i t , t he Di v i s i on i s st af f ed wi t h naval
engi neer s whos e j ob i t i s t o pr ov i de cost s and pr i c e i nf or mat i on t o t he
Mar i t i me Commi s s i on f or t hei r gui dance i n ac cept i ng bi ds on new cont r act s
and gr ant i ng subsi di es.
One of t hei r j obs i s t o est i mat e bi ds on new cont r act desi gns sent out
f or bi ddi ng.
They mak e t hei r est i mat es si mul t aneous l y wi t h t he shi p
yar ds, us i ng t he s ame s t andar d met hods and get t i ng mat er i al s cost
es t i mat es f r om t he same suppl i er s.
I t i s commonl y under s t ood t hat pr i ces
suppl i ed f or bi d pur poses ar e appr ox i mat e and s ubj ec t t o r enegot i at i on
af t er t he cont r act i s pl aced.
Fr om an i nf or mal t al k wi t h t hat Of f i ce, I gat her t hat t he annual pr i ce
i ndex i ncl udes pr i ces of al l t he new bi ds ac cept ed i n a gi v en year .
New
model s ar e l i nked t o t he ol d af t er adj ust ment s f or di f f er ences i n cost s.
The adj ust ment s ar e bas ed not on t he f i nal negot i at ed pr i ces of mat er i al s
but r at her on t he pr el i mi nar y pr i ces whi c h t he Di v i si on had obt ai ned f or
mak i ng t he bi d est i mat e.
A number of ar bi t r ar y adj ust ment s ar e made; e. g. , t o equat e pr i ces f or
di f f er ent or der si zes.
I f a one- shi p or der pr i c e has t o be compar ed
wi t h one f or f our shi ps, t he s i ngl e shi p or der i s r e- es t i mat ed as a
mul t i pl e or der , t o gi ve af f ect t o economi es of scal e.
Si mi l ar l y, when
a r e—or der f r om an ol d des i gn i s compar ed wi t h one f r om a new desi gn, an
adj ust ment i s made t o r ef l ect t he hi gher i ni t i al cost s of a new desi gn. I
I under s t and t he Mar i t i me Admi ni s t r at i on pr i c e i ndex i s wi del y used i n
t he i ndust r y and by t he Navy' s Bur eau of Shi ps, as wel l .
A char t of t he
i ndex f r om 1957 t hr ough 1962 was pr ov i ded t o t he Shi pbui l der s Counci l f or
publ i c at i on i n t hei r 1964 annual r epor t , but i t has not been publ i s hed
el sewher e.
The M. A. has appar ent l y not c ons i der ed publ i s hi ng i t becaus e
370
of reservations about the precision of their adjustments and the index
methodology, generally.
Mr. Lowry suggested that his office would
undoubtedly welcome BLS evaluation of their methodology.
Therefore
I
did not raise the question of weights and formula, not wishing to be cast
in the role of BLS critic in our informal meeting.
There are some obvious pitfalls in estimating cost differences between two
designs or even between two shipyards, regardless of who makes the estimates.
6 addUStment
contract costs by materials prices obtained at the time
the bids were made is unsatisfactory, since the negotiated prices may
contain freight and other additional charges.
It is virtually impossible to
compare steel prices between designs, except at the base price level, since
the cost of steel extras for special width, length, thickness, cutting,
inspection, etc., vary so much between different designs.
It is also
difficult to make a true comparison of overhead and labor costs between
®::^LardS\ dUe fc? differences in accounting systems, supervision piece work
td
’ lncentive P ay > subcontracting procedures, work rules, etc.,
ese are points I picked out of an M.A. study on -comparative regional
shipyard costs— not from Mr. Lowry.)
As you probably know, the M.A. Office of Estimates still works up a cost
index, mainly from WPI group 10 prices, labor costs, and, I believe, estirUf-h*1 ° ^ rhead.costs- 1 ^
have misunderstood this, but I believe the cost,
rather than price, index is still used for escalating contracts.
However,
a
o
U
f
f
t-H
t h
^ Xtare
1
e
t w
o
S
’
W
s
o
h e n
s
t r
? ,h
i k
a
i n
r t e
g
d
a
l y
d
n
d
i f f e
c o m
r
e
P
a
n
t ,
r e
d
as
w
i t h
t o
t h
c
o
e
n
p
v
i n
r i c
c
e
e
i n
t h
e
d
e
x
,
M.A.
t h
o
e
f
m
t h
o
e
v e
n
m
e
e
e
n
t s
d
Ih l
1^ eX’ a! SUCh* The diver8ence would be expected, however, since
the M.S. considers the amount of actual and anticipated construction in the
m
flexibility7 81Ven tlme ±S thS Sln8le 8reatest determinant of price
r:ldrn
t
,
a
We
have 3
t0 th°r °u 8h ly evaluate this index of
a more formal basis, before proceeding to construct a competitive price index
as such.
Before proceeding further, we need a clear concept of the W n d of
’
index we ought to attempt as a first effort.
I am covering this point in a
separate memorandum.
v
3 71
APPENDI X I I I
- D
STEEL FORGI NGS! /
TURBI NE SHAFT ( 33- I nch Di amet er )
For ged st eel
shaf t ,
r ough ma chi ned al l
ov e r al l owi ng 1/ 8" on a
sur f ace ( 1/ 4" on di amet er and l engt h f or t ur bi ne ma nuf a c t ur e r t o f i ni sh
al l
ov e r per det ai l
di amet er axi al
shown on dr awi ng ex c e pt
hol e shi l l
t hat
13. 000" t o 13. 062"
be smoot h bor ed by t he f or gi ng suppl i e r t o a
mi cr oi nc h f i ni sh of 125 f or a bor oscopl c I nspect i on by t he suppl i e r per
" Not e 3" on t he dr awi ng.
Es t i ma t e d Rough Ma chi ne d We i ght -
53, 760 l bs.
Speci f i cat i on ASTM A235,
Anneal ed.
No I ngot shal l
Cl ass E,
be ma de f r om mor e t han one he at of st eel
wi t hout
per mi ssi on of t ur bi ne manuf act ur er .
Shaf t subj ect
ar r i val
pi pes,
axi al
1/
“
t o I nspect i on 1n t he suppl i er ' s pl ant and agai n af t e r
a t t ur bi ne ma nuf a ct ur er ' s pl ant .
For gi ng mus t be f r ee of
seams or f l aws of a ny ki nd ei t he r on ext er nal
cr acks,
sur f aces or 1n t he
hol es.
Sour ce: ' DMs T o i T o f I ndust r i al Pr i ces and Pr i ce I ndexes,
Pr i ces and Li vi ng Condi t i ons, Bur eau of La bor St at i st i cs.
Of f i ce of
372
APPENDI X V- A
COUNTRY
PRACTI CES
i n
NATI ONAL ACCOUNTI NG
at CONSTANT PRI CES
*
( Ex c e r p t :
and
*
*
*
*
Na t i o n a l
Pr a c t i c e s , Go v e r n me n t
Pr i v a t e No n - Pr o f i t Se r v i c e s )
PROGRAMME OBJ ECTI VES:
I mp l e me n t a t i o n and Pr o s p e c t s
*
*
*
*
*
STATI STI CAL OFFI CE
of t he
UNI TED NATI ONS
UN ECONOMI C AND SOCI AL
E/ CN. 3 / 4 6 4
24 Ma y 1 9 74
COUNCI L
National practices in'conpillng the contribution of producers of government and of private non-profit services
;nW
to the gross domestic product at constant prices based on the S]
2.
1.
Country and approach
Producers of government services
I.
1f-S
«S-
Developed countries
Austria
General approach
Producers of private non-profit services
to households
W/E-NO/I
.
Table 5-
No separate estimate available.
No single typical approach for all components.
Detailed method and/or
indicator used
prlc^trends^of^overrHnent'comsumption^/construction and'consumer prices.
employees engaged in construction affairs
services: Number of hospitalizations multiplied
S
I
y
.
81
purposes
~
Depreciati^:
Construction:
C^pen^tlon
(days™?*treatment)! taenltles’and other social
Social security: Number of insured pensions.
Other purposes^
B^trapolated by average of all
Nominal values deflated by price index of construction and equipment.
Information not available.
Belgium
General approach
Detailed method and/or
indicator used
Value added deflated by index of wage and salary rates.
No further information available.
No single typical approach for all components.
Canada
General approach
Detailed method and/or
indicator used
No single typical approach for all components.
The following Indicators are used in extrapolating value
rates. Constant dollar
Local and provincial government: Wages and salaries are d e f l a t ^ y
M defence): The number of employees,
depreciation estimates are added to the measure.
e e
8
average earnings. Constant dollar depreciation
classified b y occupational category, are weighted with * “ *-**“ :,
personnel classified by rank, are weighted
estimates are added to the measure
Defence: Numbers of * m e d ^ ^ « ^ ^ ¿ / o c c u p a t l o n a i category, are
with base-year average earnings. The numbers
services- Wages and salaries are deflated by
weighted with base-year average earnings. Education and related service .
ag
elementary and
S
£ax
r ^ t = n :
H E
zsszrm x.
and other utilities: Output is extrapolated by population and annual average c a n y pumpag
municipalities, combined by using base-year unit costs.
Denmark
ssr
Information not available.
ltput deflated by specially constructed deflators, and the deflated series are used as indicators for
General approach
Detailed method and/or
indicator used
Lfferent cost e l u a n t s are added up to the total output
“ ^ ^ ^ s ^ S ^ ' b y S^SSTcSSSS 5
c a r t L i l e n a t e d by price Index relating to gross capital formation.
2 2 °f ASE—
"
tl0n
Price deflation of value added.
Finland
lue added extrapolated by volute Index for output obtained by price deflation.
General approach
Detailed method and/or
indicator used
Thé following indicators are used in
extrapolating value added.
Religious organizations: Labour income deflated
by the consumer price index. Welfare organiza
tions: Labour income deflated by an index of
average weekly earnings in selected service
industries. Private households: Labour income
deflated by the consumer price index.
bile administration and defences: Wag.28^
^
“ ^ b u S S ^ o s t o - ^ e ^ r s ^ ^ S n t e ^ e ' b y co^lnS'lrxiex for
iployment, imputed rent and depreciation by Index of b u U d l n g c
, se^ ceB co8t W e X e. or physical quantity Indexes
^ ‘used^^For ipUbiicW education°and
Deflated by means of cost indexes which are
of the same type as for central government
services.
the s t » method is used as for public administration and defence.
CO
-^1
CO
r a l e 3.
Rational practice* In compiling the contribution of producers of government and of private non-profit services
CO
to the gross domestic product at constant prices based on the S N A ^ (continued)
Country and approach
1.
^
0
Producers of government services
I.
France
d.
Developed countries
'
------ Producers of private non-profit services
to households
(continued1
General approach
Value added deflated by index of wage rate.
Detailed method and/or
indicator used
Each year's estimates of wages and salaries are based on the wages and salaries of the previous year and are
subsequently converted to constant values of a fixed base year by a process of chaining?
“ • m r and are
T e
Information not available.
Germany, Fed. Bep. of
General approach
Value added estimated directly, Input added to arrive at gross output.
Detailed method and/or
indicator used
related to government expenditure on materials.
F
Dy lnaexe8
of
input prices
ValP“
d T b l ^ r ^ p o l a t e d
persons engaged with an addition for
increases in productivity.
by
Greece
General approach
Detailed method and/or
indicator used
Value added extrapolated by employment, adjustment made for increase in productivity.
T „
Public administration and defence and public education: The estimates at constant prices are based on a combination
r^ ,^e8enti1^ employment figures and one conventionally taken a s r e f l e c t i n g ^ h f i n c r e a ^ i ^
J
?o“ £ r a ?
'
^
aVallable*
**" laSt i M e X (°ne per cent
for public a d m i n i s t r a t ^ n ^ d ^ o ^ r Tent for
8peclflc at,!dy °f
Gre<* <=««. hut Is based on the experience o? some ^ther
Ireland
General approach
Detailed method and/or
indicator used
Value added extrapolated by employment.
No further detail available.
Information not available.
Italy
General approach
Detailed method and/or
indicator used
No single typical approach for all components.
avi,
. . . . . .
Public administration and defence: Price deflation of value added
1(0 separate estimate available.
Wages and salaries: Deflated by arithmetic mean of Index for contractual salaries of civil servants in central
government, classified by category and rank, and Index of average salaries for all civil servants
Wages and
salaries in kind: Deflated by Implicit price Index for commodities Involved. Depreciation- estimates based on
perpetual inventory method. Imputed rent: Deflated by Implicit price Index for gross fixei c a p l S f X r ^ S r a
Social, recreational and related cccsnunlty services: Double deflation. Output: Education- Extrapolated bv '
Index of number of pupils In various types of schools. Health services: Hospitals extrapolated by^ndex 0/
bed-day. Other sanitary services deflated by price Index for doctors' examinations, etc. Other
Deflated by
general cost-of-living index. Input: Deflated by specially constructed Index numbers.
Deflated by
Luxembourg
General approach
Value added extrapolated by mean, of employment data, vlth adjustment of
0 .5
per cent for productivity change.
No
separate estimate available.
Netherlands
General approach
Extrapolated by means of output index.
Detailed method and/or
indicator vised
Output extrapolated by quantity data of factor services (manpower).
No further detail available.
w
a £8
52S-
/C'ndA
No separate estimate available.
National practices in compiling the contribution of producers of government and of private non-profit services
^
to the gross dasestlc product at constant prices baaed on the SNA-' (continued)
tn
English
Page 52
Table 5.
* t
CD
fo cr
'—
Country and approach
1.
„ a
__.
Producers of government services
I.
2.
Producers of private non-profit services
to households
Developed countries (continued)
Norway
General approach
Detailed method and/or
indicator used
Output deflated hy price indexes for inputs.
for each of the lfi accounts of centrsl government end the Ik accounts of local government services output Is
deflated by price indexea ecmputed for Inputs of materials, vages and salaries and consumption of fixed capital.
Wages and salaries are deflated by Laepeyres' Indexea of wage rates based on earnings of employees in different
occupational levels in the base year.
Portugal
No separate estimate available.
General approach
Price deflation of value added.
Detailed method and/or
indicator used
Current value added deflated by indicators which reflect the changes in the remuneration of goverment employees
compared to the base year (19 65).
Sweden
General approach
Detailed method and/or
indicator used
No separate estimate available,
Double deflation.
.
Wages and salaries for the base year 1963 extrapolated by employment indexes «rich are based
>“>
u
Output: Deflated be relevant series from
.__, ... ..n
r s c o n s u m e r
price Index.
« p l r i r . S ^ k « “a n ^ e s ^ r 1 o ^ u S u ^ u P5 ° r i x S
tie’^ r f ^ S e l L c h value, after allovanoes for
consumption of fixed capital have been obtained by adjusting th. replacanent values for the different types of assets
with the ratio between expected residual lifetime and total expected lifetime.
United Kingdom
Input: Deflated by specially constructed
price Index,
No single typical approach for all components.
General approach
No single typical approach for all components.
Detailed method and/or
indicator used
The following indicators are used In extrapolating value added. National government services:
vomen's services: Weighted Indexes for number in each rank. Non-industrial civil servants: Weighted Index of staff.
Industrial civil servants: Number in employment. Local goverment services: Police and fire services: Weighted ror
number in each rank. Other local goverment services: Number in employment. Other community and social services:
“ “ ' s e ^ c e s “ 1" n et h°4 “ USe4 ^
nent services.
Scientific services, religious organisations,
etc.: Number employed.
5 s
rates.
—
Local authority health services:
Weighted Index of numbers of patients for each type of service and number of
- —
—
employed,
school children inspected.
United States
General approach
Detailed method and/or
indicator used
Information not available.
No single typical approach for all components.
Public administration and defence: Value added extrapolated by employment. Value . M e d
wherever possible and otherwise by employment, separately for military personnel (offieers and enlisted men separately),
and civilian employees except those on work relief.
rvwmunitv and social services: Education: Deflated by index of average annual earnings per employee. -Medical and
other health services: Deflated by Implicit price index derived from various kinds of medical care services. Museums
and galleries, etc.: Deflated by special price index derived from average annual earnings per full-time employee
concerned.
II.
Argentina
General approach
Detailed method and/or
indicator used
,
.
Value added extrapolated by number of persons employed.
Developing countries
No separate estimate available.
The weights are based on value added in i960 .
oo
•^j
cn
Table 3.
National practices in compiling the contribution of produce« of government and of private non-profit services
Ca )
to the gross domestic product at constant prices based on the S N A ^ (continued)
CT>
Country and approach
1.
Producers of government services
II.
2.
Producers of private non-profit services
to households
Developing count lies (continued)
Chile
General approach
Price deflation of value added.
Detailed Method and/or
indicator used
Current value added deflated by index of wages and salaries.
No separate estimate available
Colombia
General approach
Price deflation of value added
Detailed method and/or
indicator used
Current value added deflated by index of wages and salaries,
Ghana
approach
^iadicator*uaad *“a/’°r
Talua addad Mtiiaatod dir«ctly, intamsdiat. conaurption added to arrive at gioea output.
Th* M t i n a t M ar. made aaparately
tor
No separate estimate available
central goverment (including public inatitutionn) and local governoent.
Value added: Extrapolated by index numbers of employment. Intermediate consumption: Deflated by unit price index
covering food, paper and paper products, chemicals and miscellaneous manufactured goods which are comaonly used by
goverment services. Depreciation: Deflated by price index for machinery and equipment.
Guatemala
General approach
Value added deflated by index of wages and salaries
Detailed method and/or
indicator used
Current value added deflated by index of wages and salaries.
No separate estimate available
The weights are based on value added in 1968.
Honduras
General approach
Value added deflated by index of wages and salaries
Detail«! method and/or
indicator used
The walght» are baaed on value added in 1918.
No separate estimate available
Ho further details available
India
General approach
Current price estimates are left unadjusted.
No separate estimate available
Indonesia
General approach
Value added estimated directly, intermediate consumption added to arrive at gross output.
Detailed method and/or
indicator used
The estimates are made separately for central and local government. In both cases, number of employees is used as
indicator of value added, and intermediate consunption is deflated by the consumer price ind«x re-weighted for the
No separate estimate available
n u n viRii.
Korea, Republic of
General approach
No single typical approach for all components
Detailed method and/or
indicator used
Wages and salaries: Extrapolated by index of the mxnber of employees weighted by rank. Imputed rent: Current
estimates of repair costs deflated by index of building repair costs. The index of building repair costs is calcu
lated by using wholesale price indexes of various building materials and wages of construction workers weighted by
the input structure of the base year.
No single typical approach for *1 1 components
Research and scientific institutes* Current
value added deflated by component for service
charges in consumer prices for *11 cities.
Education: Base-year estimate extrapolated
by average index of numbers of teachers and
students. Medical and other health services:
Base-year extrapolated by index of the number
of doctors and patients received. Welfare
services: Services of Red Croes: Current
estimates deflated by index of service charges
in consigner prices for all cities. Other wel
fare services: Base-year estimate extrapolated
by index of the number of persons admitted.
Religious organisations: Base-year estimate
extrapolated by index of the number of clergy
and adherents. Trade Union: Base-year esti
mate extrapolated by average index of the
manber of branches and union members. Libraries,
m u e m s , etc.: Base-year estimate extrapolated
by index of the niaber of staff nachera.
Table 3.
National practices in compiling the contribution of producers of government and of private non-profit services
2.
1.
Country and approach
Producers of goverment services
II.
Producers of private non-profit services
to households
15
to the gross domestic product at constant prices based on the SNA*'(continued)
Developing countries (continued)
Malaysia
General approach
No separate estimate available
Current price estimates have been retained (public administration and defence)
Philippines
General approach
Value added extrapolated by index of employment
Detailed method and/or
indicator used
No further details available
No separate estimate available
Sri Lanka
General approach
No single typical approach for all components
Detailed method and/or
indicator used
Public atfainistration and defence* Baee-year value added extrapolated by index of number of employees.
government services* Current value added deflated by wage rate index of government esployees.
No separate estimate available
Other
Syrian Arab Republic
General approach
Double deflation
Detailed method and/or
indicator used
Output*
Input*
No separate estimate available
Deflated by index of wages and salaries.
Deflated by retail price index for Damascus.
Uganda
General approach
Value added at current prices used for constant prices.
No separate estimate available
Venezuela
General approach
1/
Value addod extrapolated by indicator of wages and salaries.
No separate estimate available
The table is based on the information that was available to the Statistical Office of the United Nations when the table was prepared.
CO
^0
378
APPENDI X
VI
- A
SUMMARI ES OF U. S. GOVERNMENT CONSI DERATI ONS
OF PRI CE I NDI CES, ^ 966- 1972
1.
" Gover nment Pr i ce St at i s t i c s , 1' a r epor t of t he Subc ommi t t ee on
Economi c St at i st i cs, Joi nt Economi c Commi t t eeT
UJ>. _ . Congr ess. Jul y 1966„
Thi s r epor t summar i zes a ser i es of hear i ngs,
May 1966,
on gover nment
f r om Jul es Bachman,
Kof f sky,
I r vi ng B.
pr i ci ng pr act i ces.
Raymond T.
Kr avi s,
Bowman,
Ar t hur M.
hel d at t he end of
The commi t t ee hear d paper s
Sol omon Fabr i cant ,
Ross,
Nat han M.
Ri char d Ruggl es and Lazar e
Teper .
I t was gener al l y det er mi ned t hat mor e coor di nat i on i s needed be
t ween gover nment agenci es i n t hei r pr i ci ng pr act i ces and t hat a much
l ar ger r esear ch ef f or t
i s cal l ed f or ,
a mor e accur at e and ef f ect i v e Feder al
speci f i c i ndexes,
t he CPI ,
WPI ,
I PI ,
i f onl y t o be abl e t o det er mi ne
ec onomi c pol i cy.
and Far mer s'
As f or
I ndex wer e cr i t i qued,
and t wo new i ndexes wer e r ecommended:
a.
The Cons umer Pr i ce I ndex .
det er mi ne j ust how wel l
cons umer gr oups;
Resear ch shoul d be car r i ed out t o
t he CPI measur es pr i ce t r ends af f ect i ng maj or
and r esear ch i s needed t o quant i f y t he i ncr ease i n t he
CPI _, whi ch i s due t o changes i n r el at i ve pr i ces bet ween base per i ods.
b.
The Whol es al e Pr i ce I ndex .
The week l y dat a base shoul d be
augment ed wi t h t he obj ect i v e of maki ng i t a mor e accur at e i ndi cat or of
3 79
cur r ent commodi t y pr i ce t r ends.
pr esent 52 t o about
Cover age shoul d be ex panded f r om t he
115 i ndus t r i es , t hus mar k i ng a st ar t
i n t he
And
devel opment of an i ndust r y i nput - out put t abl e of pr i ce i ndexes.
col l ec t i on of dat a on pr i ces pai d by buyer s f or sel ect ed pr oduc t s , such
as met al s and machi ner y,
i ng t he t er ms of act ual
shoul d be i ni t i at ed i n or der t o i nsur e obt ai n
t r ansact i ons,
f r om l i st pr i ces i n per i ods,
c.
whi ch of t en di f f er si gni f i c ant l y
such as t he pr es ent
The I mpl i ci t Pr i ce I ndex .
( 1966) .
Pr i ce dat a used i n def l at i ng r eal
out put shoul d be made compar abl e t o t he sect or s bei ng def l at ed.
Spec i f i c at i on pr i ci ng shoul d be ex t ended t o t he cons t r uc t i on i ndus t r y .
Resear ch shoul d pr oceed on ways t o i mpr ove meas ur ement of gover nment
and ser vi ce out put .
And cont r i but i ng agenci es shoul d c ons i der t he I PI
of hi gh pr i or i t y i n meet i ng t hei r obl i gat i ons.
d.
I ndex of Pr i ces Pai d and Recei v ed by Fanner s .
Per sonal
enumer at i v e pr i ci ng shoul d be i nst i t ut ed, wher e speci f i c at i on pr i ces
ar e di f f i c ul t t o obt ai n by mai l
s ur v ey .
The i ndexes f or f ar m f ami l y
l i vi ng expens es shoul d be mor e c ompr ehens i v e, wi t h r egi onal
subi ndexes.
New pr i ce i ndexes shoul d be devel oped f or cons t r uct i on cost s ( t he
Bur eau of t he Census " composi t e"
i ndex bei ng qui t e def ect i ve)
ex por t - i mpor t
pr i ces as r ecommended by I r vi ng Kr avi s,
i nt er nat i onal
compet í ' t i v enes s .
2.
and f or
t o ai d U. S.
" J oi nt Economi c Commi t t ee Repor t on t he Januar y 1973 Economi c
“
Repor t of t he Pr esi dent . " Mar c h 26. 1973T
The commi t t ee di sagr ees wi t h bot h t he Pr es i dent ' s 1973 Economi c
Repor t and wi t h DOD' s " The Economi cs of Def ense Spendi ng - A Look at
380
t he Real i t i es"
( see Sect i on D) , i n whi ch i t i s as ser t ed t hat r eal
def ense
expendi t ur es have decl i ned over t he past f our year s by over 30 per cent ,
ar e now t he l owest
per c ent
i n t he past 22 year s,
i n 1969 t o 42 per cent
and have dr opped f r om 54. 5
i n 1973 of t he Feder al
budget .
The t wo maj or cr i t i ci sms ar e POP' s met hod of def l at i ng def ense
ex pendi t ur es and t hei r def i ni t i on of
I n r el at i on t o t he f i r st
" def ens e" .
cr i t i ci sm,
DOD uses t he nonc ompensat i on
component of t he Commer ce def l at or f or goods and ser vi ces,
even t hough
i t does not di st i ngui sh bet ween def ense and nondef ense i t ems and makes
no al l owances f or pr oduc t i vi t y i ncr eases.
i s not def l at ed.
I n addi t i on,
Thi s woul d cons i der abl y al t er t he f i nal
As f or t he second cr i t i c i s m - t he def i ni t i on of
por t i ons of i nt er nat i onal
t echnol ogy,
af f ai r s and f i nance,
i n t he Pr esi dent ' s budget ,
Feder al
f i gur es.
" def ense" - i f
space r esear ch and
and i nt er est wer e ac knowl edged as nat i onal
per c ent of t ot al
r et i r ement pay
secur i t y cost s
t hen def ense spendi ng woul d be cl oser t o 50
out l ays r at her t han t he es t i mat ed 30 per cent .
" Thi s def i ni t i on of def ense spendi ng r ai ses f ur t her doubt s over t he
Admi ni st r at i on' s cl ai ms about r eor der i ng nat i onal
The commi t t ee,
i n concl usi on,
cal l s on t he Depar t ment of Commer ce
t o devel op measur es of pr i ce changes i n Feder al
equal
pr i or i t i es. "
def ense pur chases of
qual i t y t o t hose f or def l at i ng ot her sect or s of t he GNP and t o
publ i sh such meas ur es on a r egul ar basi s.
3*
" The Feasi bi l i t y of Const r uc t i ng Weapons Sy st em Pr i ce I ndexes, "
Repor t t o t he Joi nt Economi c commi t t ee by t he- - - - - - - - - - Gener al Ac count i ng ut t i ce, Oc t ober 1971
Thi s st udy was i ni t i at ed at t he r equest of t he Joi nt
Economi c
381
Commi t t ee t o hel p eval uat e t he cont r i but i on of i nf l at i on t o cost ov er
r uns i n mi l i t ar y weaponr y.
The GAO i nvest i gat ed avai l abl e pr i ce i ndexes
and f ound t hey wer e unsui t abl e because t hey wer e based on non- mi l i t ar y
pur chases or di d not i ncl ude a suf f i c i ent cr os s- sect i on of mi l i t ar y
i t ems.
For exampl e,
t he WPI
f or Fabr i c at ed St r uct ur al
Met al
has been used as one of t he ser i es compr i si ng t he mat er i al
weapon syst em;
st eel
however ,
f or bui l di ngs,
door s,
t he maj or i t ems,
r esi dent i al
i . e. ,
i ndex f or a
f abr i cat ed st r uct ur al
al umi num wi ndows,
and assembl ed st eel
i n t he i ndex ar e not necess ar i l y r el at ed t o weapons.
mat er i al
Pr oduct s
Al so,
l abor /
wei ght s var y gr eat l y i n weapons syst ems and ar e not ac count ed
f or i n t he WPI .
The GAO cons i der ed t wo t ypes of i ndexes:
( 1) end- i t em i ndexes,
whi ch show t r ends i n pr i ces of ent i r e weapons syst ems,
or ai r cr af t ,
and ( 2)
i nput pr i ce
pr oduct i on of t he end- i t ems.
such as shi ps
i ndexes of l abor and mat er i al s used i n
I t was concl uded t hat
f r equent and ex t en
si ve spec i f i c at i on changes i n weapons syst ems pr ec l uded cons t r uc t i on of
an end- i t em i ndex,
However ,
ex cept f or ver y si mpl e syst ems,
e. g. ,
an Ar my t r uck.
s uf f i c i ent dat a wer e av ai l abl e t o const r uct meani ngf ul
pr i ce i ndexes f or l abor and mat er i al
t he gener al
( capi t al
i nf r equenc y wi t h whi ch capi t al
pr i ce was excl uded due t o
i s pur c hased and t he
di f f i c ul t y i n al l ocat i ng t he cost of capi t al
weapons syst ems) .
i nput
equi t abl e t o i ndi vi dual
The pr i ce i ndexes empl oy ed i n t hi s st udy wer e base-
y ear - wei ght ed Laspeyr es i ndexes.
A br i ef over vi ew i s gi ven of pr i or use and st udi es of mi l i t ar y pr i ce
i ndi ces.
The i ndexes t hat have t he l ongest hi st or y of DOD use ar e t hose
38' 2
i n Ar my and Navy cont r act es cal at i on cl auses.
Pr i or t o 1970,
0MB
r equi r ed t he pr epar at i on and submi s si on of budget es t i mat es i n t er ms of
t he pr i ce l evel
at
t he t i me of budget
pr epar at i on.
Of f i ci al
weapons
syst ems pr i ce i ndexes wer e used onl y on cont r act escal at i on cl auses,
wher e t hey wer e used r et r ospect i v el y r at her t han pr ospect i vel y.
bet t er known i ndexes wer e t he Navy' s " Mat er i al
I ndex f or St eel
The
Vessel
Cont r act s, " t he " I ndex of Change i n St r ai ght - t i me Hour l y Ear ni ngs f or
Sel ect ed Shi pyar ds i n St eel
Pur pose Tact i cal
Vessel
Const r uct i on, " and t he " Gener al
Vehi cl es I ndex A0"
The mat er i al s i ndex and t he t act i cal
on WPI
component s,
vehi cl es i ndex ar e bot h based
whi l e t he ear ni ngs i ndex i s based on a sur vey of 18
Navy cont r act ed shi pyar ds.
However ,
per mi ssi on t o i ncor por at e i nt o annual
ant i ci pat ed i nf l at i on f or R&D,
maj or const r uc t i on pr ogr ams;
i n December 1970,
0MB gr ant ed DOD
budget es t i mat es al l owances f or
pr oc ur ement of maj or weapons syst ems,
t hi s may r esul t
and
i n gr eat er cons i s t enc y i n
t he est i mat i on of pr i ce changes ant i ci pat ed as a r esul t of i nf l at i on.
Thr ee r ecent st udi es of mi l i t ar y pr i ce i ndexes,
whi c h ar e based on combi nat i ons of sel ect ed WPI
t he f i r st t wo of
ser i es and dat a on
ear ni ngs ( as ar e t he t hr ee ment i oned i n t he par agr aph above) ,
t he 1969 " Ander son St udy"
1970 RAND st udy,
st udy
by H.
pr oduct i on.
i n t he DOD Resour ce Anal ysi s Di vi si on,
" Aer ospace Pr i ce I ndexes" by H. G.
Pi car i el l o,
ar e :
Campbel l ,
( 1)
( 2)
t he
and ( 3)
a
based upon mat er i al s ac t ual l y used i n def ense
The Ander s on St udy i s an " excel l ent model
of an at t empt
t o der i ve pr i ce i ndexes by ut i l i zi ng r eadi l y av ai l abl e mat er i al . "
ser i es i s used, wei ght ed by var i ous t echni ques i n Navy' s St eel
A WPI
Shi p I ndex
3 8 3
Vehi cl e I ndex and t he Campbel l
AMC' s Tact i cal
sever al
dat a def i ci enci es,
f i vef ol d:
( 1)
of pr of i t ,
t axat i on,
t he maj or shor t comi ngs of t he r epor t
t he i ndi ces concer n i nput
l abor cost
pr of essi onal
and not out put pr i ces;
Besi des
ar e
( 2)
and ot her i ndi r ect cost s ar e not consi der ed;
pr oduc t i vi t y changes ar e not
and ( 5)
Ai r f r ame I ndex.
i ncl uded;
i ndi ces r ef l ect
and manager i al
( 3)
( 4) many mat er i al s ar e onl y pr oxi es;
dat a f or onl y wor ker s and not f or
per sonnel .
The RAND st udy deal s onl y wi t h ai r f r ames,
and el ec t r oni c component s and accessor i es.
l ar t o t hat of Ander son,
r at es
but Campbel l
mi ss i l es and spacec r af t
Campbel l ' s appr oach i s s i mi
does i ncl ude an ov er head component
i n t he composi t e i ndex f or each subs ys t em and uses a di f f er ent
l abor /
mat er i al s pr opor t i on.
The t hi r d st udy,
done by Pi car i el l o,
i s based on def ense mat er i al s
r equi r ed under t he Def ense Mat er i al s Syst em.
i ndust r i al
al l oys.
mat er i al s ar e used:
st eel ,
al umi num,
and ni ckel
Pr i ce dat a wer e obt ai ned f r om BLS and Census of Manuf act ur er s'
r epor t s.
The pr esent
i ndexes ar e t oo hi ghl y aggr egat ed,
cover onl y t hese basi c commodi t i es,
t he l evel
mat er i al
copper ,
Four cat egor i es of basi c
but
i f t he cover age i s ex panded and
of aggr egat i on shi f t ed t o end- i t ems,
i nput
si nce t hey
sound i ndust r y- wi de
pr i ce i ndexes f or weapons syst ems mi ght be devel oped.
Based on demonst r at i on i ndexes cons t r uc t ed f or ai r cr af t ,
el ect r oni cs,
t he f ol l owi ng concl usi ons wer e r eached:
( 1)
shi ps,
and
pr i ce i ndexes
f or bot h di r ect and over head l abor may be cons t r uc t ed f r om company
empl oy ment
dat a;
( 2) mat er i al s pr i ce i ndexes can be devel oped f or onl y
a pr opor t i on of t he mat er i al s i nput s i nt o weapons syst ems,
owi ng t o t he
384
speci f i cat i on change pr obl em;
pr i ce i ndexes ar e necessar y;
( 3) bot h cont r act or and i ndust r y- wi de
( 4)
r epr esent at i ve bi l l s of mat er i al s f or
maj or syst ems ar e nec es s ar y ; and ( 5)
t he BLS coul d r eadi l y conduct
def ense i ndust r y sur veys.
I t i s r ecommended t hat
WPI
i ndust r y- wi de pr i ce i ndexes anal ogous t o t he
be cons t r uc t ed by t he BLS f or r epr esent at i ve i t ems used i n di f f er ent
t ypes of weapons s y s t ems , i . e. ,
wi l l
submar i nes,
i dent i f y t he cont r i but i on of f undament al
pr i ce change.
i ndi vi dual
I f t her e i s no subst ant i al
i ndex wi l l
et c.
Such i ndexes
i nf l at i onar y f or ces t o
di f f er ence bet ween t he
cont r ac t or pr i ce i ndex and t he i ndust r y - wi de pr i ce i ndex,
ei t her i ndex may be used.
4.
f i ght er s,
I f t her e ar e di f f er ences,
t he i ndust r y- wi de
r epr es ent basi c i nf l at i onar y f or ces.
" The Economi cs of Def ense Spendi ng - A Look at t he Real i t i es, "
~ by Compt r ol l er , Depar t ment of Def ense, Jul y 1T T Z
The r epor t seeks t o pr es ent a st r ong def ense of pr esent
l evel s of
mi l i t ar y spendi ng and t o r ef ut e c r i t i c i s m t hat t he def ense budget
wast ef ul ,
a.
and i nf l at i onar y.
Nat i onal
at t he l owest
past
6. 5%)
The maj or emphases ar e:
def ense spendi ng f or FY73 i n cons t ant dol l ar s wi l l
l evel
be
si nce FY51.
b.
Manpower l evel s wi l l
c.
Nat i onal
be at t he l owest
l evel s si nc e 1950.
def ense spendi ng has f al l en shar pl y i n each of t he
f i ve year s wi t h about
d.
is
a 30 per c ent r educt i on f r om FY68 t o FY73.
The def ense shar e of GNP has dr opped t o t he l owest l evel
( about
si nce FY50.
The onl y i nf or mat i on on t he DOD met hod of pr i ce def l at i on i ndi cat es
t hat
t he BEA non- compensat i on def l at or f or NI A Feder al
pur chases of goods
385
and ser vi ces i s used.
( An unpubl i s hed not e desc r i bed above pr esent s
mor e i nf or mat i on on t he DOD pr i ce i ndexes. )
af t er consul t i ng wi t h sever al
l ar gel y on t he WPI
Feder al
Pr oj ect i ons ar e made by DOD
ot her agenci es.
The BEA def l at or ,
based
and wei ght ed i n accor dance wi t h t he pr opor t i on of
pur chases i n each segment ,
i s used i n connect i on wi t h al l
goods
and ser vi ces pr ocur ed f r om i ndust r y wi t h t he ex cept i on of f ood and
cl ot hi ng f ur ni shed t o mi l i t ar y per sonnel
and cer t ai n t r avel
and t r ans
por t at i on cost s i n connec t i on wi t h per manent moves of mi l i t ar y per sonnel
( PCS) .
Thes e i t ems aggr egat e about
component of t he CPI ,
t he act ual
$1. 5 bi l l i on year l y.
cost of a st andar d mi x of cl ot hi ng i t ems,
and a bl end of t r av el / t r ans por t at i on i ndi ces ar e used,
5.
The f ood
r espect i vel y.
" Al l owi ng f or t he Ef f ect s of I nf l at i on i n Pr oj ect i on Ex pendi t ur es i n
Depar t ment of Def ense, " A1 Si ncl ai r , Mar ch 1972
Thi s i s a shor t
f i r st dr af t of a paper on DOD t r eat ment of i nf l at i on.
DOD pl aces i t i n t hr ee ex pendi t ur e cat egor i es:
a.
Di r ect Manpower Cost s ( about 50 per cent of DOD budget t ot al )
ar e r ef l ect ed i n t he budget
pr oj ec t i on;
pr oposal
Maj or Syst ems Pr oc ur ement ,
cent of budget )
( 1)
or ( 2)
at i on of i ndex except
y ear as base) .
R&D,
and Cons t r uct i on ( about 25 per
i ncl udi ng i nf l at i on
use of speci f i c dat a appl i c abl e t o i ndi vi dual
syst ems ( cont r act pr ovi si ons,
et c. ) ,
y ear budget .
ar e r ef l ec t ed by " best est i mat es, "
ef f ect s by ei t her :
changes,
at t he t i me of
al l owances ar e i ncl uded f or ant i ci pat ed act i ons whi c h wi l l
i nvol ve ext r a pay cost s i n t he f i scal
bo
at r at es i n ef f ect
l abor agr eement s,
pr oduc t i vi t y and quant i t y
use of pr i ce i ndi ces ( no expl anat i on f or det er mi n
t hat
i t i s usual l y wei ght ed wi t h pr evi ous f i scal
Two t abl es seem t o be most of t en us ed— " Pr i ce
386
Escal at i on I ndi ces" and " Est i mat ed Expendi t ur e Rat es" — t he l at t er
i ndi cat i ng per cent ages of t ot al
r equest s t o be spent
i n each f i scal
year .
c.
budget )
Al l
t he Pur c hased Goods and Ser vi ces ( about 25 per cent
ar e pr i ced at l evel s per t ai ni ng t o t he Fal l
pr ogr am/ budget
t he Fal l
cycl e,
l evel .
of
of t he appr opr i at e
wi t h no al l owance made f or pr i ce i ncr eases above
Thi s necessi t at es a cer t ai n amount of i nf l at i on
absor pt i on.
The paper has a copy of " Est i mat ed Expendi t ur e Rat es f or FY 1972
and Subsequent Year ' s Pr ogr am" appended t o i t .
6.
" Weapon Sy st em Cost i ng, " Memor andum f r om t he Of f i ce of
t he As si st ant Sec r et ar y of Def ense Comnt r ol l er
3 u n e T5 7 0 1- - - - - - - - - - - - - - - - *- - - - - - Thi s memor andum suppl i es OSD r ecommended i nf l at i on f act or s ( usi ng
FY 1971 as base year )
pr ocur ement ,
RAD,
f or use by al l
OSD agenci es i n es t i mat i ng
and const r uct i on cost s t hr ough FY 1976.
Der i vat i on of t he Pr i ce I ndi ces
a.
The l abor component s,
1957 - 1968:
( 1) Non RAD l abor :
The meas ur e of
l abor cost used was BLS
dat a on t he " Aver age Hour l y Ear ni ngs of Pr oduct i on or Mon- super v i s or y
wor ker s. "
The l abor cost
f or any f i scal
dat a dur i ng t he f ol l owi ng cal endar year .
compensat e f or t he f act t hat most
cont r act
i s l et .
y ear was der i ved f r om obser v ed
Thi s l ag was i ncl uded t o
l abor i s used sever al
mont hs af t er a
I n gener al , wage dat a f or cal endar y ear N + 1 was
used t o appr oxi mat e l abor cost s i n f i scal
( 2) RAD l abor ;
y ear N.
RAD l abor was based on engi neer i ng sal ar y
387
dat a obt ai ned f r om t he Nat i onal
Washi ngt on,
D. C0
Soci et y of Pr of essi onal
The dat a i s compos ed of medi an sal ar y dat a f or t hr ee
ki nds of engi neer s:
Exec ut i v e - admi ni st r at i ve,
cal endar y ear dat a was t r ansl at ed i nt o f i scal
t hat
f i scal
Engi neer s,
desi gn,
and R&D.
The
y ear dat a by assumi ng
y ear N f undi ng i s spent equal l y i n cal endar y ear N and
I t was assumed t hat engi neer i ng sal ar i es f or t he per i od 1970 -
N + 1,
1 975 woul d cont i nue t o i ncr ease at t he gr owt h r at e ex per i enced f r om
1951 - 1968 or 4- 1/ 2 per c ent
b.
Mat er i al
Component s,
per year .
1957 - 1968:
used was t he BLS Whol es al e Pr i ce I ndex.
mat er i al
cost s.
I n gener al ,
above)
1968 I ndi c es :
ex cept
wage dat a,
of t he l ast
r i si ng,
d.
A shor t
t he appr opr i at e WPI
y ear N was used t o appr ox i mat e mat er i al
c.
The meas ur e of mat er i al
cost
l ag was used t o adj ust
i ndex f or cal endar
cost s i n f i scal
y ear N.
The i ndi ces f or 1969 wer e comput ed ( as desc r i bed
t hat some wage dat a had t o be est i mat ed.
I n ex t r apol at i ng
t he es t i mat e was based on t he aver age per cent age wage i ncr ease
t hr ee year s.
Si nce t he r at e of wage i ncr ease t ended t o be
t hi s pr ovi des a sl i ght l y cons er vat i ve est i mat e of act ual
Det ai l ed Component and Wei ght i ng,
used i n cal c ul at i ng i ndi ces ar e pr esent ed.
1957 - 1969:
wages.
The wei ght i ng
Unl ess ot her wi se not ed t he
dat a sour ce r ef er s ei t her t o a whol es al e pr i ce i ndex or t o an aver age
hour l y ear ni ngs ser i es i dent i f i ed by i t s St andar d I ndust r i al
7.
Code.
“ A Mi l i t ar y Per sonnel Pr i ce I ndex" by Rober t U Wi nest one, June 1968,
~T5uppl ement t o " Mi l i t ar y Pr i ce I ndex:
A Pr el i mi nar y Pr esent at i on" )
A new aggr egat e mi l i t ar y - per sonnel
cons i der abl y di f f er ent
pr i ce i ndex i s devel oped
f r om t he cor r espondi ng subi ndex i n RAC- TP- 289.
388
For 1962- 67 mi l i t ar y - per sonnel
pr i ces ar e shown t o i ncr ease 11 per cent
f ast er wi t h t he new i ndex— a 1968 i ndex of 123. 2,
( 1963 = 100) .
4. 84 per cent
The annual
t hi s st udy,
gr owt h r at e i s 5. 36 per cent ,
i n t he ear l i er RAC st udy.
ex cess i v e wei ght
i nst ead of 120. 8
t o basi c pay,
as compar ed wi t h
Al t hough t he RAC- 289 st udy gave
t he pr i ce i ncr ease i s st i l l
gr eat er i n
due t o t he mor e- t han- c ompens at i ng downwar d bi as of t he
ci vi l i an i ndexes i n t he pr i or st udy.
The aggr egat e i ndex i s comput ed usi ng t he Paasche i ndex f or mul a
f or f i scal
year s 1962- 68 ( 1963 = 100) .
ar e def i ned as t ot al
Pr i ces
compensat i on f or a cer t ai n cl ass di vi ded by t he
number of peopl e i n t he cl ass.
annual
Ther e i s no sampl i ng.
Mi l i t ar y Per sonnel
The most
usef ul
sour ce of dat a i s t he
Hear i ngs bef or e a subcommi t t ee of t he House
Commi t t ee on Appr opr i at i ons.
Thr ee subi ndex es ar e c omput ed:
ac t i ve per sonnel ,
r eser ve f or ces,
and r et i r ed mi l i t ar y.
Wi t hi n act i ve f or ces,
a.
t her e ar e seven di st i nct
ki nds of pay :
Basi c pay - t he i ndex i s comput ed basi cal l y f r om est i mat es of
compensat i on by r ank or gr ade di vi ded by t he t ot al
number i n each r ank
or gr ade.
whi l e i n- gr ade or
Pr omot i ons ar e seen as qual i t y changes,
l ongev i t y pay ar e pr i ce changes.
b.
al l
I ncent i ve pay - t he sum of t he out l ays f or al l
dut i es i n cons t ant
r anks and f or
dol l ar s i s di vi ded i nt o t he sum of out l ays i n
cur r ent dol l ar s.
c.
Speci al
and f or al l
pay - comput ed usi ng aver age annual
t he heal t h pr of essi ons.
r at es acr oss r anks
389
d.
Pr of i c i enc y pay - t ot al
t hey wer e wei ght ed by t he t ot al
e„
DOD aver age f i gur es became t he base and
number r ecei vi ng each pay cat egor y.
Reenl i st ment bonus - due t o t he f act t hat basi c pay ser ves as
t he basi s f or comput i ng t he r eenl i st ment payment ,
basi c- pay i ndex i s cons i der ed pr opor t i onal
t he enl i st ed- per sonnel
t o t he r eenl i st ment - bonus
payment pr i ce.
f.
Al l owanc es - ( 1) quar t er s al l owance:
comput ed on t he basi s
of di st r i but i ons of r anks or gr ades wi t h t he per capi t a r at es as t he
pr i ces and t he number of r eci pi ent s wi t h dependent s
f or each y ear as
t he quant i t i es ;
( 2) of f i cer ' s subsi st ence:
r emai ned unchanged t hr ough
out t he per i od;
( 3)
t he sum of cur r ent out l ays
uni f or ms and cl ot hi ng:
di vi ded by t he c ons t ant - dol l ar out l ays pr oduced t he i ndex;
separ at i on:
c ons t ant
i ndex of 100. 0 pr esumed;
( 4)
f ami l y
( 5) sever ance pay:
t he
sum of cur r ent dol l ar s f or si x separ at e cat egor i es di vi ded by t he
const ant dol l ar f i gur es pr oduces t he i ndex;
cont r i but i ons by t he empl oyer :
g.
( 6) soci al
secur i t y
TnQn/ T0Qn .
Ot her pr ogr ams - ( 1) enl i st ed subs i st ence;
( 2) per manent changes
of st at i on ( PCS) — aggr egat ed t ot al s used due t o l ack of det ai l ed dat a.
For r eser ve f or ces a si mpl er pay- and- al l owance i ndex i s used by
aggr egat i ng ac t i ve- f or ces i ndexes and wei ght i ng t hem by t he appr opr i at e
ac t i ve- f or ces obl i gat i ons.
For r et i r ement
pay,
t he subi ndex i s
devel oped i n t he same manner as t he basi c pay i ndex.
8.
" Aer ospace Pr i ce I ndexes, 11 by H.
G.
Campbel l
( RAND)
December 1970
Af t er under t ak i ng t hi s pr el i mi nar y st udy t he aut hor suggest s t hat
i t i s possi bl e t o devel op r eas onabl y accur at e i nt er i m i ndexes wi t h a
390
mor e compr ehens i v e t r eat ment of aer ospac e pr i ce i ndex es .
The f ol l owi ng poi nt s emer ge:
WPI
( a) any i ndex based sol el y on t he
i s at best an i ncompl et e appr ox i mat i on of aer ospace mat er i al
mov ement
and ver y pr obabl y i s i ncor r ect ;
ear ni ngs r at e,
as publ i s hed by BLS,
r el i abl e measur e of pr i ce changes,
c omponent of cost ;
( c)
over head,
t i on i n pr evi ous I ndexes,
( b)
t he annual
aver age hour l y
appear s t o be a usef ul
but onl y f or t he di r ect
and gener al ! v
l abor
whi ch has been omi t t ed f r om cons i der a
i s an i ncr easi ngl y l ar ge component of cost
( f r equent l y over 50 per cent )
but
many component s ( f act or y bur den,
i s di f f i c ul t
gener al
comput er r ent al ,
t o meas ur e due t o i t s
and admi ni st r at i ve bur den,
t r avel
and per di em,
et c. ) ,
and t he var i ous t echni ques by whi ch i t i s account ed f or .
over t i me pr emi um,
cer t ai n t axes,
I f dat a ar e av ai l abl e on t he cost of r aw mat er i al s,
equi pment ,
di r ect
l abor ,
t he manuf act ur i ng per i od,
pr i ce
and over head,
as wel l
pur chased
as i nf or mat i on concer ni ng
an accept abl y accur at e pr ocedur e woul d be t o
appl y appr opr i at e i ndexes t o each of
t he maj or component s.
( The most
ac cur at e met hod i nvol ves appl yi ng wage and ov er head r at es cur r ent l y
ex per i enced by t he f i r m i n quest i on t o t he past act ual
ar e sel dom avai l abl e,
The f i r st
such dat a
however . )
i ndex devel oped by t he aut hor i s an ai r f r ame cost
f or y ear 1953 t o 1969 ( 1969 = 100;
s uoi ndex es :
hour s;
( a)
r aw mat er i al
and 1970 = 100) ,
der i ved f r om WPI
whi ch i ncl udes f i ve
component s wei ght ed
ac cor di ng t o i nf or mat i on obt ai ned f r om a maj or ai r c r af t
r ef l ect i ng r ecent exper i ence;
( b)
i ndex
pr oducer
par t s ov er head— desi gned t o measur e
t he ef f ect of changes i n over head cost of ai r f r ame pur chased equi pment ;
391
( c)
pur chased equi pment - c omput ed f r om t he r aw mat er i al
t he ai r cr af t
par t s l abor i ndex ( BLS) ;
combi nat i on of t he r aw mat er i al
i ndex and
( d) mat er i al s — a wei ght ed
and pur chased equi pment
i ndexes;
and
( e) ov er head- bas ed on an assumed 2 05 per cent compounded r at e i ncr ease
appl i ed t o t he ai r cr af t
pr oduct i on wor ker s'
hour l y ear ni ngs i ndex ( BLS) .
A second set of i ndex es , devel oped f or 1958- 1964,
el ect r oni cs,
gui ded mi ssi l es,
and s pac ec r af t :
( a)
cover ai r bor ne
t he el ect r oni c s c om
ponent s over head i ndex i s based on an est i mat ed y ear l y i ncr ease of 2
per cent appl i ed t o t he el ec t r oni c component s hour l y wage r at e i ndex
( BLS) ;
( b)
t he el ec t r oni c mat er i al s i ndex i s compos ed of t he el ec t r oni c
component s and ac cessor i es mat er i al
hour l y ear ni ngs i ndex,
i ndex ( WPI ) ,
t he BLS el ec t r oni cs
and t he el ec t r oni c component s over head i ndex.
( Because of t he het er ogenei t y of ai r bor ne el ec t r oni c equi pment ,
aut hor di d not comput e a gener al i zed over al l
t he gui ded mi ss i l es and spacec r af t
2. 5 per cent annual
( c)
i ncr ease i n over head r at es appl i ed t o t he mi ssi l es
mi ssi l es and spacec r af t
i ndexes,
avi oni cs pr i ce i ndex. )
over head i ndex i s based on an assumed
and spacec r af t wage r at e i ndex ( BLS) ;
mat er i al
t he
and ( d) t he over al l
gui ded
pr i ce i ndex— whi ch i ncl udes t wo component
t he el ec t r oni c mat er i al s i ndex and t he ai r f r ame ma
t er i al s i ndex.
The poi nt Campbel l
st r i ves t o make t hr oughout
t he st udy i s t he
r el at i ve i mpor t ance of over head i n any pr i ce i ndex anal y s i s .
A maj or cr i t i que ( ment i oned i n t he GAO st udy,
Const r uct i ng Weapons Sy st em Pr i ce I ndexes" )
" The Feas i bi l i t y of
of t he st udy i s t he l abor /
mat er i al s r at i o r esul t i ng f r om Campbel l ' s met hodol ogy.
He combi ned an
392
over head i ndex based on ear ni ngs and sever al
mat er i al
a l abor i ndex t o obt ai n an aggr egat e pr i ce i ndex;
pr i ce i ndexes al so cont ai n a l abor component .
wei ght
st at es,
i n t he Campbel l
pr i ce i ndexes wi t h
some of t he mat er i al
Thus,
i ndex amount s t o 92 per cent .
t he ef f ect i ve l abor
As Campbel l
hi ms el f
t he i ndexes ar e " based on r at her ar bi t r ar y assumpt i ons and
wei ght i ngs. "
9*
" Measur i ng Pr i ce and Pr oduc t i vi t y Change i n t he Ai r c r af t I ndus t r y
J. A. Dei Rossi , The Rand Cor por at i on, RM- 53057~A' pr i l l 97f f - - Changes i n i nput
uni t
cost al one cannot be used t o meas ur e out put
pr i ce change.
Al l owanc es f or changes i n t he r el at i ve i nt ensi t y of
use
of t he i nput s,
changes i n pr oduc t i vi t y and changes i n t he qual i t y of
out put must al so be made.
The f i r st
sect i on of t he st udy measur es appar ent out put
changes, wher e t he meas ur e of out put
f or ai r c r af t and par t s i s t ot al
apr f r ame wei ght and f or engi nes and par t s t ot al
The maj or dr awback of t he ai r cr af t out put
i mpor t ance t o each pound,
pr i ce
pounds of t hr us t .
dat a i s t hat
i t gi ves equal
r egar dl ess of changes i n t he mi x of ai r cr af t .
The maj or di f f i c ul t y wi t h t he engi ne out put
dat a i s t hat
aver age t hr ust
f i gur es over t he var i ous modi f i cat i ons of speci f i c engi ne desi gnat i on
number s wer e used.
Ther e woul d be no sat i sf ac t or y way t o avoi d t hi s
wi t hout compl et el y r econs t r uc t i ng t he engi ne pr oduct i on hi st or y f or
each engi ne.
t ot al
The pr i ce i ndex i s der i ved by di vi di ng t he r at i o of t he
val ues f r om one per i od t o anot her by t he r at i o of t he quant i t i es
f r om one per i od t o t he ot her .
a°
Measur i ng Qual i t y Change and i t s I mpact on Out put
Some di mensi ons of qual i t y t hat
Pr i ce
can be quant i f i ed and measur ed f or
393
ai r cr af t ar e:
max i mum speed at al t i t ude,
engi nes t hey ar e:
wei ght
r at i os.
t hr ust ,
speci f i c f uel
payl oad and r ange.
For
consumpt i on and t hr ust
t o dr y
By r egr essi ng pr i ce agai nst t hese speci f i cat i ons at some
st andar d uni t on t he var i et y of model s of ai r cr af t
at t he same t i me,
and engi nes bei ng sol d
t he i mpact on pr i ce of each speci f i c at i on can be
Usi ng t he val ue of t hese spec i f i c at i ons and t he t i me per i od
der i ved.
chosen f or t he r egr essi on as t he base per i od val ues,
at subs equent
t he val ues obser v ed
t i mes can t hen be i nser t ed i nt o t he equat i on t o obt ai n a
measur e of pr i ce change due t o changes i n qual i t y speci f i cat i ons.
pr obl em wi t h t hi s appr oach i s det er mi ni ng how t o aggr egat e
and
( One
wei ght
t he r egr essi ons appr opr i at el y f or t he r el at i ve quant i t at i ve i mpor t ance
of var i ous model s. )
necessar y,
mobi l es:
b.
The aut hor t hen shows r egr essi on equat i ons
as adapt ed f r om Gr i Ti di es'
Hedoni c Pr i ce I ndexes f or Aut o
An Economet r i c Anal ysi s of Qual i t y Change.
I nput Pr i ce Dat a
Ther e ar e t hr ee maj or t ypes of i nput s maki ng up t he val ue of s hi p
ment s:
l abor , mat er i al
on pl ant and equi pment
and al l
ot her , wher e al l
and ot her mi sc el l aneous i t ems.
f or changes i n qual i t y of out put ,
af f ect i ng changes i n out put
i nput s used,
( 2)
ut i l i z at i on of
dat a.
Af t er al l owi ng
t her e ar e t hr ee basi c f act or s
pr i ces:
( 1)
changes i n uni t
pr i ces of
changes i n t he pr oduc t i vi t y of i nput s and ( 3)
i nput s.
t he cont r i but i on t o t he val ue of s hi p
t he ot her f act or s i s t r eat ed as a r esi dual
I n addi t i on,
r el at i ve
Whi l e t he Bur eau of Census publ i shes dat a on
payr ol l s and cost of mat er i al s,
ment s of al l
ot her i ncl udes r et ur ns
t her e ar e no cl ear l y usef ul
i n t he census
measur es of quant i t y or
394
pr i ce f or t he cost
use of
of mat er i al s dat a.
These t wo f act or s pr ecl ude t he
t he val ue of shi pment dat a and t he dat a on i t s component s f or
t he meas ur ement of aver age changes i n i nput
pr i ces because t her e
i s no way t o der i ve appr opr i at e wei ght s or uni t
c.
Out put
pr i ces f or t hese i nput s.
Dat a f or Pr oduc t i vi t y Meas ur ement
The anal ysi s of pr oduct i vi t y depends upon t he use of t he pr oduct i on
f unct i on concept because t he pr oduct i on f unct i on est i mat i ng pr ocedur es
use i ndexes r at her t han act ual
of shi pment s,
and may be
t o out put .
" val ue added"
wei ght ed v al ues 0
i s used.
I nst ead of usi ng val ue
Thi s excl udes t he cost of mat er i al s
vi ewed es sent i al l y as t he cont r i but i on of l abor and capi t al
The payr ol l ,
di vi des oy t he aver age annual
l ess r api dl y t han val ue added,
empl oy ment
di vi ded by aver age annual
r ose
empl oyment .
Thi s woul d i ndi cat e t hat changes i n l abor pr oduc t i vi t y have of f s et
changes i n l abor cost s.
of t he amount of f act or
However ,
t hi s compar i son gi ves no i ndi cat i on
subs t i t ut i on t hat has occur r ed dur i ng t he r ser i od;
i t t her ef or e gi ves no i ndi cat i on of t ot al
However ,
r eal
f act or pr oduc t i vi t y change.
t he aut hor f ound t her e was such f act or subst i t ut i on t hat
c api t al - t o- l abor r at i o exhi bi t ed a r i se and t hat
capi t al
( pr of i t di vi ded by capi t al ) ,
wage r at e) ,
t he r et ur n t o
r el at i ve t o t he r et ur n t o l abor ( t he
has decr eased si gni f i cant l y.
To measur e pr oduc t i vi t y change,
t he equat i on of val ue added i n cons t ant dol l ar s,
of aver age annual
t he
empl oy ment and capi t al
equal l i ng a f unct i on
st ock i n const ant dol l ar s,
based on a const ant el as t i ci t y of subs t i t ut i on pr oduct i on f unct i on ( as
descr i bed by Ar r ow,
Economi c Ef f i ci ency)
Chener y,
i s used.
et c,
i n Capi t al
Labor Subs t i t ut i on i n
The ef f i ci ency f act or i s est i mat ed,
39 5
al l owi ng f or changes i n r el at i ve f act or pr i ces,
f act or usage and changes i n capi t al
t echnol ogy.
r espect
changes i n r el at i ve
i nt ensi t y of t he pr oduct i on
The const ancy of el as t i ci t y r ef er s t o i t s i nvar i ance wi t h
t o changes i n r el at i ve f act or suppl i es and not
t o t r ansf or mat i ons
of t he under l yi ng t echnol ogy.
Meas ur ed Pr oduc t i vi t y and I nput Pr i ce Change
d.
Wi t h t he est i mat es of t he el as t i ci t y of subs t i t ut i on and t he
capi t al
t ot al
i nt ensi t y coef f i ci ent ,
i t i s possi bl e t o est i mat e changes i n
f act or pr oduc t i vi t y and i nput pr i ce change under di f f er ent
as sumpt i ons about t he r at e of qual i t y change.
The downwar d t r end f or t he pr oduc t i vi t y i ndex,
upt ur n i n t he l ast
t hr ee year s , make i t appear t hat
t oget her wi t h t he
t he obser v ed out put
pr i ce mov ement has i t s r oot s i n decr eased pr oduct i vi t y,
i ncr eased i nput pr i ces.
i nput
The downwar d mov ement of t he est i mat ed aver age
pr i ce change ov er t he f i r st
cl usi on.
On t he ot her hand,
es t i mat ed out put
adj ust ment
dol l ar s.
pr i ce i ndex,
sever al
year s r ei nf or ces t hi s c on
t he pr oduc t i vi t y t r end i s dependent
dat a t o const ant
t he es t i mat ed i ndex of aver age i nput
i s dependent on t he es t i mat ed out put pr i ce i ndex.
est i mat es of qual i t y change wer e made,
pr i ce change
Si nce no empi r i cal
i t shoul d be added t hat an
assumed aver age r at e of change f r om 12 t o 13 per c ent woul d of f s et
appar ent
on t he
bot h t hr ough t he est i mat ed capi t al
f act or and t he conver si on of t he out put
Si mi l ar l y,
r at her t han
pr i ce i ncr ease t r end al most ent i r el y and,
t he downwar d t r end i n pr oduct i vi t y.
Si mi l ar l y,
t he
i n t ur n, el i mi nat e
i f one el i mi nat es
t he down t ur n i n t he pr i ce i ndex i n t he l ast t hr ee year s t hr ough t he
396
meas ur ement of qual i t y change,
t he appar ent
i ncr ease i n ut i l i zat i on
woul d al so be el i mi nat ed.
The t r end of subst i t ut i ng t he l ess cost l y good ( capi t al )
mor e cost l y good ( l abor )
cost of mat er i al s)
i ndi cat es t hat out put pr i ce changes ( excl udi ng
ar e mor e di r ect l y r el at ed t o pr oduc t i vi t y t han
changes i n t he i nput
1° .
f or t he
pr i ces.
The Techni cal Devel opment of Moder n Avi at i on. Mi l l er and Sawer s,
( Appendi x 3, P «, 302, An I ndex oT I nput Pr i ces)
Thi s i s a composi t e i ndex of t he cost of oper at i ng an ai r pl ane
cons t r uc t ed by usi ng t he f ol l owi ng f our i t ems:
and oi l , mechani c s and t he ai r c r af t .
pr i ces,
To get
f l yi ng per sonnel ,
t he i ndex of ai r cr af t
an at t empt was made t o cons t r uc t an i ndex of t he changi ng pr i ces
of new ai r c r af t
Some
of unchanged desi gn over t he per i od of t he st udy.
of t he di f f i cul t i es wer e t hat even a st andar d ai r pl ane t ype,
DC- 3,
f uel
such as t he
has shown some modi f i cat i ons and i mpr ovement s over t he year s.
has been necess ar y t o i gnor e t hese changes.
second- hand ai r c r af t was not
pr act i cal
It
Usi ng t he pr i ces of t he
because t her e was such a wi de
r ange of pr i ces of used ai r cr af t dependi ng upon t hei r condi t i on.
The
al t er nat i v e adopt ed was t o l i nk t oget her var i ous ser i es of new ai r cr af t
pr i ces ( i „ e. ,
pr i ces of ai r c r af t
i n each of t he year s i n whi ch t hey
wer e act ual l y bei ng manuf act ur ed) ,
A pr i ce ser i es was pr epar ed f or
t he whol e per i od of manuf act ur e of each ai r cr af t
ser i es ov er l apped i n t i me,
t ype.
Si nce t hese
i t was possi bl e t o l i nk t hem t oget her t o
pr oduce an i ndex f or t he whol e per i od.
3 9 7
11.
" A St andar d Cl as si f i cat i on Sy st em f or t he I ndi r ect Cost s of Def ense
" Cont r ac t or s i n t he Ai r c r af t I ndust r y, " bv Maj or Ot t o B. Mar t i nson,
U. S. Ai r For ce Academy. I 9G9
Mar t i nson under t ook t hi s st udy wi t h t he assi st ance of sever al
agenci es i n 1969 t o hel p i n DOD cont r act
cont r act s of $100, 000 or mor e.
cost
anal ysi s,
DOD
r equi r ed of al l
The i nt ent was t o put t he anal ysi s of
i ndi r ect cost s wi t hi n t he DOD pr ocur ement
pr ocess on a mor e meani ngf ul
and sy st emat i c basi s and r equi r e al l
anal ysi s i n t he pr i ci ng of
cost
POP cont r act s t o be done on a const ant
l i shed i ndex t o def l at e cont r act or s'
OOP cont r act
dol l ar basi s by usi ng an es t ab
cost dat a.
cost s ar e cl assi f i ed as ei t her di r ect
or i ndi r ect cost s.
A di r ect cost
i s one t hat can be i dent i f i ed spec i f i c al l y wi t h a par t i c
ul ar cont r act ,
maki ng i t mor e suscept i bl e t o anal ysi s and eval uat i on.
I ndi r ect cost s ar e t hose r emai ni ng af t er al l
i dent i f i ed.
di r ect
cost s have been
They ar e usual l y r ef er r ed t o as over head cost s and ar e not
r el at ed t o any speci f i c cont r act
t echni ques t o account
obj ect i ve.
The nonuni f or mi t y of
f or i ndi r ect or over head cost s,
combi ned wi t h t he
f act t hat t hey cons t i t ut e t he maj or i t y of a cont r act or ' s i npl ant gener at
ed cost s ( t ot al
cent age of t ot al
cost i nput mi nus di r ect mat er i al
cost s, makes t hem di f f i cul t
cost s)
and a l ar ge per
t o anal yze.
The met hod used i n t he DOD Pr ogr am Management Sy st em of
i ndi r ect
f unct i on,
pr esent i ng
cont r act cost s was t o l ump t hem t oget her i nt o a l i near cost
cal l ed " over head r at e" — i ndi r ect cost s as a f unct i on of some
common base such as di r ect l abor hour s ( DLH) or dol l ar s, i . e. , ov er head
i ndi r ect cost s
r at e =
DCH
Thi s met hod pr ovi ded a means of al l ocat i ng cost s
t o cont r act s ( " cost r ecover y" )
but di d not st ar t
t o manage t hese cost s
398
( " cost
i ncur r ence" ) .
accompanyi ng i nput
The " i ndi r ect cost cl as si f i cat i on syst em, " wi t h
cost
i ndex, was devel oped i n r esponse t o t hi s need.
Mar t i nson' s cl assi f i cat i on syst em was devel oped on t he basi s of a
det ai l ed st udy of t he ac count i ng sy st em of el even ai r cr af t pl ant s f or
year s 1962- 1965.
si ze,
The el even pl ant s wer e sel ect ed on t he basi s of t hei r
( empl oyi ng about
about 41 per cent ) ,
255, 300 of t he 617, 151 emol oyees i n t he i ndust r v- -
t he qual i t y of DCCA ( Def ense Cont r act Cr edi t Agency)
audi t or s l ocat ed i n each and t he pr oduct
avi oni cs,
and ai r f r ames) .
gat her ed f r om DCCA,
t hey pr oduced ( j et engi nes,
Besi des t he el even pl ant s,
dat a wer e al so
t he Of f i ce of t he As si st ant Secr et ar y of Def ense -
I nst al l at i ons and Logi st i c ( OASD , I ® L ) , and t he Of f i ce of
Cont r act
I n addi t i on,
Compl i ance - Def ense Suppl y Agency.
r evi ew of t he l i t er at ur e was under t aken,
f r om t he Logi st i c Management
Feder al
a t hor ough
i ncl udi ng a 61- i t em bi bl i ogr aphy
I nst i t ut e and a 151- i t em bi bl i ogr aphy f r om
t he Logi st i c St udi es I nf or mat i on Exchange.
The r evi ew of t he ac count i ng syst ems of t he el even pl ant s i ndi cat ed
t hat ai r cr af t manuf act ur i ng f i r ms have cost ac count i ng syst ems,
pr ovi de a t r i modal
al .
vi ew of cost s:
obj ect ,
f unct i onal ,
t hat
and or gani z at i on
The obj ect mode r ef l ect s cost s i n t hei r " nat ur al " cl assi f i cat i on,
i . e. ,
accor di ng t o t he nat ur e of t he goods and ser vi ces consumed.
i s t he mode used i n t hi s st udy.
The f unct i onal
i n t er ms of t he pr ocess consumi ng r esour ces,
It
mode i dent i f i es cost s
and t he or gani zat i onal
mode
i dent i f i es cost wi t h t he i ndi vi dual s r esponsi bl e f or t hei r management .
Mar t i nson' s cl as si f i cat i on sy st em consi st s of el even maj or cost
modes:
i ndi r ect
l abor ,
empl oy ee benef i t s,
payr ol l
t axes,
empl oyment ,
399
communi cat i on/ t r avel , pr oduct i on r el at ed,
t i es - equi pment ,
admi ni st r at i ve,
f aci l i t i es - bui l di ng,
f aci l i
f ut ur e busi ness and ot her mi scel l aneous.
Each cost mode was di vi ded i nt o a number of subel ement s.
syst em was used t o t r ansf or m cont r act or s'
A t hr ee- di gi t
codi ng
cost dat a i nt o t he maj or cost
modes and subel ement , wher eby i t was det er mi ned t hat l abor and f aci l i t i es
t oget her account f or 93. G per cent of t ot al
i ndi r ect cost s.
Due t o t he dear t h of pr i ce i ndexes f or such dat a ( t he I mpl i ci t Pr i ce
Def l at or f or Feder al
pr i at e) ,
Expendi t ur es and t he WPI wer e consi der ed i nappr o
an i mpl i ci t pr i ce def l at or f or t he i ndi vi dual
const r uct ed, wi t h 1962 base year ,
I =
SH-jW-j wher e I-j = ( p n / po ) i
The i ndi vi dual
usi ng t he f ol l owi ng f or mul a:
a n ^ wi = ( pn ^ n ) i / £ pnQn •
mode i ndexes wer e comput ed as f ol l ows:
I ndi r ect Labor .
a.
cost modes was
The t wo cat egor i es,
and cl er i cal / t echni cal , f r om t he Nat i onal
Admi ni st r at i ve, Techni cal
and Cl er i cal
pr of essi onal / admi ni st r at i ve
Sur vey of Pr of essi onal ,
Pay wer e wei ght ed on t he basi s of
t he number of wor ker s i n manuf act ur i ng i ndust r i es i n t he BLS sur vey.
b.
Empl oyee Benef i t s.
f or f i ve cat egor i es:
ment ,
Dat a f r om t he el even pl ant s was accumul at ed
pai d absences, empl oyee i nsur ance,
savi ngs,
r et i r e
educat i on and ot her benef i t s, whi ch wer e wei ght ed as a per cent age
of t he annual
c.
t ot al
Payr ol l
of empl oyee benef i t s.
Tax es .
i ndexes f or FI CA and FSUI
These wer e comput ed on t he basi s of t wo sub
( Feder al
and St at e Unempl oyment I nsur ance) .
The FI CA i ndex was comput ed on t he basi s of t he amount an empl oyer must
pay each year f or each of hi s empl oyees who ear n t he base amount ;
FSUI ,
t he
on t he basi s of t he amount of t axes pai d per dol l ar of payr ol l .
400
The t ot al
t ot al
t axes pai d by t he el even pl ant s wer e di vi ded by t hei r
FSUI
amount of l abor cost s, whi c h yi el ded a y ear l y FSUI
r at e used t o
comput e t he i ndex.
d.
Var i at i ons i n st at e t ar i f f s pr ecl uded any i ndex
Empl oy ment .
comput at i on;
i ndi r ect
e*
si nce t he mode amount s t o l ess t han 1 per cent of t ot al
cost ,
i t was not seen as si gni f i cant .
Communi c at i on/ t r av el .
conv er t ed t o a 196? base,
The BEA nat i onal
f or t r avel ,
ex pendi t ur e def l at or ,
communi cat i on,
and ut i l i t i es was
used.
Pr oduct i on Rel at ed.
met al
pr oduct s,
l abor .
t ot al
Thr ee i ndexes wer e devel oped:
i ndust r i al
commodi t i es,
met al
ft
and cl er i cal / t echni cal
These wer e wei ght ed as a per cent age of t ot al
cost and used f or
t hr ee cat egor i es:
ex pendabl e t ool s; manuf act ur i ng supnl i es/ ser vi ces;
and mat er i al ,
handl i ng and pr oduct
g.
t ool
Fac i l i t i es .
bi ned and r epr esent ed by
ser vi ci ng,
Bot h bui l di ng and equi pment
BEAnat i onal
f aci l i t i es and mi l i t ar y equi pment .
Admi ni s t r at i v e.
pr oduct s,
l abor .
They wer e wei ght ed by expr essi ng
cl er i cal
of f i ce suppl i es,
ser vi ces,
Fut ur e Bus i nes s .
paper and paper
and pr of es si onal / admi ni st r at i ve
These wer e wei ght ed as a per cent age of
and pr of essi onal
^•
cost of f aci l i t i es.
Thr ee i ndexes wer e devel oped:
chemi cal s and al l i ed pr oduct s,
t hr ee cat egor i es:
cat egor i es wer e c om
ex pendi t ur e def l at or s f or mi l i t ar y
each cat egor y as a per cent age of t he t ot al
h*
r espect i vel y.
t ot al
cost
and used f or
r epr oduc t i on/ engi neer i ng suppl i es
r espect i vel y.
The mean annual
sal ar i es f or engi neer s and
wor ker s wer e t aken f r om t he Nat i onal
Sur vey of Pr of essi onal .
401
Admi ni st r at i ve, Techni cal
and Cl er i cal
Pay and ar bi t r ar i l y wei ght ed at
, 80 and . 20 r espect i vel y.
The aggr egat e i mpl i ci t
pr i ce def l at or f or i ndi r ect cost s was
devel oped as a composi t e of t he pr evi ous ni ne subi ndexes and wei ght ed
as a per cent age of
t ot al
cost .
Usi ng t he cl assi f i cat i on syst em and i mpl i ci t pr i ce def l at or ,
Mar t i nson al so devel ops an i ndi r ect cost model , usi ng mul t i v ar i at e
( el even endogenous var i abl es and ei ght exogeneous var i abl es)
r egr essi on anal ysi s.
Asser t i ng t hat t he model
t he aut hor l i st s f i ve over al l
a.
and
coul d be much mor e r ef i ned,
l i mi t at i ons t o hi s st udy:
Cer t ai n i ncons i s t enc i es bet ween pl ant s i n ac count i ng dat a may
not have been det ect ed.
b.
The el even pl ant s do not
const i t ut e a l ar ge sampl e i n t er ms of
t he number of ac count i ng ent i t i es.
c.
o f
St at i st i cal
cost obser vat i ons:
anal ysi s was l i mi t ed,
due t o t he mi ni mum number
f i ve year s on ni ne pl ant s and t hr ee year s on t he
r emai ni ng t wo.
d.
A br eakdown of i ndi r ect l abor cost s by wor k er t ype woul d hel p
t o det er mi ne how l abor - mi x af f ect s c os t s 0
e Q Sour ces of pr i mar y dat a,
bei ng l i mi t ed t o gover nment
pr ecl uded obt ai ni ng i nf or mat i on on t he cont r act or s'
channel s,
met hods of
anal yzi ng and ev al uat i ng t hei r i ndi r ect cost and t hose of t hei r
subcont r ac t or s.
1? .
I nf l uences on Naval Shi p Cost Es t i mat i ng f or Budget Pur poses
- - - fl . H. Mai n "and J. A. het c hko, Naval Shi p byst ems t o mma mT
Mar ch 1970
~
402
Thi s paper ,
pr es ent ed at t he DOD Cost Resear ch Symposi um,
exami nes
pr obl ems of cost i ng and pr i ci ng shi ps under t hr ee headi ngs:
a.
I nher ent Pr obl ems
( 1) Shi ps ar e compl ex pr oj ect s.
( 2) Techni cal
uncer t ai nt y and t echnol ogi cal
r i sk at t end
cost est i mat i ng»
( 3) The pr oj ect s ar e of l ong dur at i on»
b.
Cont r ol l abl e Pr obl ems
( 1) Ther e i s i nsuf f i c i ent
spec i f i c at i on) at
i nput def i ni t i on ( desi gn and det ai l
t he i ncept i on of t he cost i ng pr ocess.
( 2) Ther e i s l ack of adequat e bi d dat a»
( 3) Ther e i s i nsuf f i c i ent
t i me t o devel op est i mat es.
( 4) Ther e i s a shor t age of t r ai ned per sonnel
f or cost
est i mat i ng»
( 5)
Cost i ng pr i or t o compl et i on of RDT&E phase causes er r or .
( 6) Budget i ng agai nst
c0
cont i ngenci es causes cost i no er r or s.
Non- Cont r ol 1abl e Pr obl ems
( 1)
Economi c condi t i ons and
( 2) mar k et
condi t i ons r esul t
i n uncer t ai n cost i ng.
Ther e i s a r eveal i ng compar i son of i nput
r i se t hr oughout
t he per i od st udi ed,
pr i ce i ndexes ( whi ch
onl y moder at i ng t he upwar d movement
f r om 1958 t o 1965 t hen r esumi ng shar p i ncr eases)
i ndex ( whi ch dr ops bet ween 1958 and 1961) »
answer ed i n t he negat i ve)
l ear ni ng cur ve phenomenon.
and an out put
pr i ce
The quest i on i s r ai sed ( and
whet her t he decl i ne i s t he ef f ect
of t he
403
13.
11Def ense Pl anni ng i n a Hi gh I nf l at i on Economy, " by Joseph H. August a
( Cent er f or Naval Anal ysi s) and Chr i st opher L, Snyder , Jr . C0ASD) _r
November 1970
Thi s paper i s pr i mar i l y concer ned wi t h t he Whar t on EFA,
t er m ec onomet r i c model
t i on,
I nc , l ong
as t he sour ce f or l ong- t er m pr i ce i ndex i nf or ma
The aut hor s see pr i ce pr edi ct i on as absol ut el y necess ar y i n a
hi gh i nf l at i on ec onomy , as t he U. S.
ni ng i n c ur r ent
dol l ar s does not
l evel s move sl owl y,
however ,
has ex per i enced si nce 1965.
Pl an
i nt r oduce ser i ous bi as v/ hen pr i ce
as t hey di d i n t he l at e 1950' s and ear l y 1960' s;
r api d i nf l at i on can si gni f i c ant l y change t he r el at i ve cost
of al t er nat i v e r esour ces,
as wel l
as r educe t he absol ut e pur chasi ng
power of budget s f i xed i n money t er ms.
DOD has onl y cr ude meas ur es of t he magni t ude of pr i ce i ncr eases
of def ense i ndust r i es,
1965- 1968,
r esul t i ng f r om demand- pul l
due t o t he f act t hat
expans i on dur i ng
( accor di ng t o August a)
DOD has never
pr oduc ed pr i ce i ndi ces based on t he pr i ces ac t ual l y pai d,
For l ong- r un aggr egat e suppl y - demand anal ysi s,
cast
pr i ces f or f i ve year s or mor e,
pr obabl y pr ovi des t he best
i ncome,
( c)
f i nal
( b)
t he Leont i ef I nput - Out put Model
f r amewor k.
i nt er r el at ed i n suppl y and demand:
necess ar y t o f or e
The model
( a)
i ni t i al
uses f our sect i ons,
suppl y or nat i onal
i nt er medi at e suppl y consi st i ng of t he i ndust r i al
i nt er medi at e demand cons i s t i ng of t he i ndust r i al
sect or s,
sect or s,
and ( d)
demands.
For l ong- t er m ( 5 year )
Whar t on model
out put model
i s used.
pr i ce f or ecast i ng,
For any gi ven year ,
yi el ds const ant
Kl ei n' s and Pr eson' s
t he sol ut i on t o t he i nput -
dol l ar est i mat es of t he goods and ser vi ces
gener at ed by t he economy i n t hat per i od.
To f or ecast pr i ces,
t he
404
const ant
dol l ar est i mat es of goods and ser vi ces ar e compar ed t o t he
avai l abl e capaci t i es of t he i ndust r i al
suppl y and pr i mar y f act or
sect or s.
The Whar t on pr i ces ar e l i nked wi t h DOD pr i ce i ndi ces i n t wo st ages:
Fi _rs_t , al l
ci vi l i an compensat i on i s st r i pped f r om t he cost
mi l i t ar y const r uc t i on,
housi ng.
budget
oper at i on and mai nt enanc e,
Sec ond, t he r esour ce cost
cat egor i es of
and def ense f ami l y
i ndi ces ar e " l i nked hack"
i nt o t he
appr opr i at i on i ndi ces of pr i mar y i nt er est .
The pr i ce/ cost
mi l i t ar y pay,
i ndi ces f or RAD,
pr ocur ement ,
and oper at i ons and mai nt enanc e ar e ext ensi ons of t he
met hods of Wi nest one and Beck l er ( RAC) .
and t ot al
mi l i t ar y const r uct i on,
i ndi ces pr es ent ed as i mpl i ci t
The RAD,
i nvest ment ,
pr i ce def l at or s,
oper at i ons,
ar e der i ved
I ncome Di vi si on of t he Bur eau of
by t he met hod used by t he Nat i onal
Economi c Anal ysi s.
Ther e ar e sever al
l i mi t s t o t he use of t hi s Whar t on model ,
on f or ecast s of GNP, capaci t y ut i l i zat i on and unempl oyment .
of pr i ce i ndi ces i s appl i c abl e onl y i f t he gener al
based
One set
ec onomi c condi t i ons
I f t he
assumed i n devel opi ng t hat set of i ndi ces ar e i n f act
r eal i zed.
i ndi ces ar e sensi t i ve t o changed ec onomi c condi t i ons,
t hen al t er nat i v e
set s of est i mat es must
be devel oped.
Ther e i s one st r i ki ng f eat ur e:
t he var i ous appr opr i at i ons account s have had si gni f i c ant l y di f f er ent
r at es of
i nf l at i on,
I t appear s,
submar i ne,
t hat
wi t h RSD i ncr easi ng t he f ast est .
as i n a cost st udy of an ai r cr af t car r i er and of a
l abor i nt ensi ve syst ems have r el at i vel y hi gher
i nf l at i on r at es and t her ef or e wi l l
gr ow r el at i vel y mor e exp nsi ve.
405
14 .
Th e
Co s t
o f
by
a.
B a s i c
E.
Do
Re s e a r c h
l i 'r u n n e r .
Des c r i pt i on.
E f f o r t ;
RA1ÎP
A i r
f o r c e
R H - 4 Zb O - P B ,
Thi s 1965 st udy,
Of f i ce of Aer ospac e Resear ch ( AF0AR) ,
Ex p e r i e n c e ,
Fe b r u a r y
1 9 5 4 J 964
19 6 5
f unded by t he U. S.
Ai r For ce
at t empt s t o devel op a RRD cost
i ndex f or basi c r esear ch per sc i ent i st man- mont h t o di sc ov er t he r eal
l evel
of year l y AF R&D and t o det er mi ne what
l evel
of f undi ng woul d be
r equi r ed i n t he f ut ur e f or any gi ven scal e of ef f or t .
di vi ded on a f i scal
y ear basi s among t he sever al
R&D cost s ar e
el ement s of cost ,
t he var i ous sc i ent i f i c f i el ds and t he di f f er ent t ypes of r esear ch
per f or mi ng or gani zat i ons.
The sampl e consi st s of 2118 r andoml y chosen
r esear ch agr eement s of t he Ai r For ce Of f i ce of Sci ent i f i c Resear ch
( AFOSR) .
( The AFOSR FY 64 t ot al
f or domest i c cont r act and gr ant
r esear ch agr eement s r epr es ent ed 52 per c ent of t ot al
r esear ch,
Feder al
15 per cent of
Gover nment
5.
of cost ,
t ype of agr eement
engi neer i ng,
physi cs) ,
and commer ci al
Fi scal
i nf or mat i on sci ences,
1954- 1964,
f i r ms) ,
I
l i f e sci ences, mat he
nonpr of i t
ar e r econst r uc t ed by t he f ol l owi ng f or mul a:
Qns
2.
H p° s^os
* XQo s
Thi s basi cal l y i nvol ves di vi di ng t he cost
( Pns ) by t he cost
( FY 1962 = 100)
by i t em
sci ent i f i c f i el d
and per f or mi ng or gani zat i on ( uni ver si t y,
1 =
y ear
y ear i ndexes,
( cont r act or gr ant ) ,
£ pns^ns
any gi ven y ear
and 2 per cent of t ot al
basi c r esear ch. )
i ndex Cons t r uc t i on.
( chemi st r y,
mat i cs,
DOD basi c r esear ch,
Ai r For ce basi c
per sc i ent i f i c man- mont h i n
per sc i ent i f i c man- mont h i n t he base
( Pos ) f or each cost
i t em and f or t ot al
cost .
406
c.
al l
Wei ght i ng.
The pr ocedur e used i s t o sum each i t em of cost
r esear ch agr eement s of a gi ven cl as si f i cat i on i n each f i scal
and t o di vi de each cost
t ot al
by t he t ot al
number of sci ent i f i c man-
mont hs expended i n f ul f i l l i ng t hese agr eement s .
quot i ent s r epr esent
t he aver age annual
sc i ent i f i c man- mont h f or each t ype of
dur at i on i s i mmat er i al ;
al l
y ear
The r esul t i ng
i ncr ement al
cost s t o AFOSR per
r esear ch agr eement .
Agr eement
agr eement s r eac hed i n a gi ven FY ar e i n
t er ms of t he cost s es t i mat ed and t he as soci at ed f unds obl i gat ed i n t hat
same year .
do
cost
Pr i c i ng.
Cost s ar e def i ned accor di ng t o AFOSR per sonnel
and
cat egor i es:
( 1)
Per sonnel
cost s i ncl ude t he ( a)
( usual l y f ul l
pr of essor ) ,
i nst r uct or s) ,
( c)
ant s) ,
and ( d)
( 2)
equi pment
t r avel
t he sci ent i st s ( assi st ant
t he per sonnel
( admi ni st r at i ve,
equi pment ) ,
mi sc el l aneous;
oper at i on and mai nt enance,
use al l owance,
Pr obl ems .
( 1)
pr of essor s and
et c. )
Cost s ar e di vi ded i nt o ( a) di r ect :
and publ i cat i ons,
equi pment ,
i nvest i gat or
t echni ci ans ( i ncl udi ng r esear ch and gr aduat e as s i s t
( usual l y excl udi ng capi t al
i n AFOSR) :
e0
( b)
pr i nci pal
and ( b)
sal ar i es,
benef i t s,
suppl i es and mat er i al s,
i ndi r ect
( not
i t emi zed
depr eci at i on of bui l di ngs and
admi ni st r at i ve over head,
i nsur ance and t axes.
Pr obl ems wer e def i ned as f ol l ows:
St udy concer ns onl y " basi c r esear ch" whi ch excl udes
r esear ch on physi cal
obj ect s,
i nvent i ons,
( 2) The f i gur es r ef l ect
pr ocesses or model s.
not onl y pr i ce changes but al so changes
i n t he qual i t y of sci ent i s t s and i n t he t ype,
qual i t y,
and quant i t y of
f or
407
s uppor t
i . e. ,
i t ems .
it
Th e s e
i s not
i nc r eas e or
quant i t i es
ar e not
r ef l ec t ed
i n t he c os t
knov; n wh e t h e r
t he net
ef f ec t
t he c h a n g e s me a n s
dec r eas e
i n s c i ent i f i c
( 3)
Li t t l e
i n f o r ma t i o n
of
s uppor t
e q u i p me n t
an a c c u r a t e c o s t
f 0
c hanges
cf
c al c ul at i ons ,
an
pr oduc t i v i t y .
is
a v a i l a b l e on s p e c i f i c
and s u p p l i e s ,
pr ev ent i ng
t y pes
and
d e v e l o p me n t
of
i ndex .
Concl usi on.
Bet ween FY 54 and FY 64 t ot al
man- mont h r ose 38 per cent or 6. 5 per cent year l y .
cost s per sc i ent i f i c
The cost per sc i ent i f i c
man- mont h r ose f r om $1632 i n FY 54 t o $3152 i n FY 64„
I n gener al ,
cost s
per sci ent i f i c man- mont h wer e hi gher f or cont r act s t han f or gr ant s,
cost s per sci ent i f i c man- mont h f or commer ci al
and
f i r ms wer e nor mal l y
hi gher t han t hose f or uni ver si t i es and nonpr of i t or gani zat i ons.
Cost - of - Resear ch I ndex,
15.
a.
Des c r i pt i on.
1920- 1970,
July 1371
by Hel en S. Mi l t on ( RAC- TP- 430) . ,
Thi s Depar t ment of t he Ar my - f unded st udy updat es,
t o 1970 a RAC cost - of - r esear ch i ndex , i nt r oduced i n 1960,
dat ed i n 1965.
The cur r ent
y ear dat a f or 15 i ndi vi dual
i ndex i s based on cost
per t echni cal
up
man-
r esear ch or gani zat i ons ( nonavai l abi l i t y
of dat a r educed t he or i gi nal
number of 17 or gani zat i ons)
f r om t he 1960 and 1965 st udi es i n no ot her way.
r esear ch or gani zat i ons,
and f i r st
r epr esent i ng Feder al ,
and uni v er si t y - c ont r act R&D gr oups,
and di f f er s
The 15 i ndi vi dual
i ndust r i al ,
nonpr of i t ,
( or about 12 per cent of t ot al
U. S.
R&D per sonnel ) , wer e sel ect ed because t hei r pr i mar y mi ssi ons wer e i n a
r epr esent at i ve f i el d of r esear ch or R«D.
as 1920 f or one or gani zat i on,
most
Dat a i s used f r om as ear l y
and f r om 1930 f or t hr ee mor e,
but
of t he dat a r ef er t o year s 1950- 1970.
b0
I ndex Const r uct i on.
The cost - of - r esear ch i ndex,
gi ven by year
408
1920- 1970 and by t ype ( i ndust r y,
and Feder al
Gover nment ) ,
per t echni cal
man- year
sc i ent i s t or engi neer ,
or gani zat i ons.
pr i vat e nonpr of i t ,
i s based on t he annual
( " t echni cal
uni v er si t y cont r act ,
aver ages of t he cost
man" def i ned as t he pr of essi onal
pl us hi s suppor t )
of t he f i f t een par t i ci pat i ng
Bot h 1950 and 1968 ar e used as base year s f or compar i son
wi t h t he f or mer gr aphi cal l y i ndi cat i ng much mor e dr amat i c al l y t he
i ncr ease i n cost s f r om 1950 t o 1970.
Co
Wei ght i ng.
i ndust r i al ,
The gr oup i ndexes f or par t i ci pat i ng Feder al ,
uni ver si t y - s ponsor ed,
and pr i vat e nonnr of i t or gani zat i ons
ar e wei ght ed on t ne basi s of nat i onal
per cent ages of gr oup r epr es ent a
t i on i n t he t ot al
as r epor t ed i n i nt er mi t t ent
R&D man- year ef f or t
sur veys by t he NSF i n t he 1950' s and 1960' s.
i ndex f or 1950- 1970 i s al most
i dent i cal
Thi s cost - of - r esear ch
wi t h t he cur ve based on t he
aver ages of t he i ndexes of t he 15 or gani zat i ons.
d.
Pr i c i ng.
The t echni cal
suppor t i ng t echni cal ,
and equi pment ,
man- y ear cost s, whi ch i ncl ude sal ar y,
admi ni st r at i ve,
and al l
by di vi di ng t he t ot al
and hous ek eepi ng st af f s,
ot her appl i cabl e over head cost s,
annual
machi nes
ar e der i ved
cost of each par t i c ul ar RSD or gani zat i on
par t i ci pat i ng i n t he st udy by t he number of sc i ent i f i c and t echni cal
per sonnel
wor ki ng i n t he or gani zat i on.
Annual
cost s gener al l y ar e
based on equi pment and oper at i ng expenses i ncl udi ng r ent ;
excl ude capi t al
e.
i nvest ment s ex cept
Pr obl ems .
They have,
depr eci at i on char ges.
( 1) The i ndexes meas ur e R?<D i n t er ms of t echni cal
man- year s onl y and not
changes.
f or annual
t hey
i n t er ms of amount ,
t her ef or e,
qual i t y,
or pr oduct i vi t y
been assessed as bei ng nei t her i nput
409
nor out put
pr i ce i ndexes,
of pr oduct mi x,
wor ds,
but r at her meas ur es of t he
changes i n man- hour mi x,
combi ned ef f ect
I n ot her
and pr i ces and wages.
t he i ndex i t sel f needs t o be def l at ed.
( 2) The per sonnel
cl assi f i cat i ons var y i n t he i ndex and do not coi nci de wi t h NSF dat a.
For exampl e,
NSF dat a f or t he U. S.
sci ent i st s, whi l e by def i ni t i on,
i ncl udes soci al
i ndust r y sect or excl ude soci al
" s ci ent i f i c and t echni cal
per sonnel "
sci ent i st s and psychol ogi st s i n t he col l ect i on of
i ndex
dat a.
f.
Conc l us i on.
y ear cost s,
1950- 1970,
The aver age annual
i s 6 per cent .
i ncr ease i n t echni cal
The i ndex of t he Feder al
man-
Gov er n
ment ' s R&D cost s r ose f ast er i n t he 60' s t han di d t hose of i ndust r y,
pr i vat e- nonpr of i t ,
and uni ver si t y or gani zat i ons.
The i ndex shoul d be
updat ed i n 1973 t o det er mi ne t he r at e of change i n cost per t echni cal
man- year i n r el at i on t o t he 1963- 1970 per i od,
and i t mi ght
be cal cul at ed
t hr oughout on t he 1968 base.
16.
Exper i ment al I nput Pr i ce I ndexes f or Resear ch and Dev el opment ,
- ~T H9 5 1 - 5 5 , Bur eau of Labor St at i s t i cs ( f or Nat i onal
Sci enc e Foundat i on) , November 1968.
Thi s i s t he f i nal
i n 1966,
r epor t of t he NSF- f unded BLS st udy,
by Al l an D. Sear l e ( dat a gat her i ng by Fr anci s S.
I t i s an at t empt
under t aken
Cunni ngham) .
t o devel op pur c hase- pr i ce i ndi ces f or i nput s i n Ar my
R&D ut i l i zi ng a sampl e of 23 Ar my l abor at or i es ( t he uni ver se)
wi t h
pr ogr ammed obl i gat i ons of $500, 000 or mor e and of 23 pr i vat e l abor at or i es
hol di ng " maj or " cont r act s wi t h t he Ar my l abor at or i es ( memor andum) .
For a descr i pt i on of t he i ndex devel oped usi ng a modi f i ed
Laspeyr e' s met hod and i t s wei ght i ng and pr i ci ng t echni ques,
see t he
410
summar y of Sear l e' s ar t i cl e,
Pr i ce I ndex es 0"
" Resear ch and Devel opment
The r epor t , whi ch i ncl udes appendi ces wi t h f ul l
i ndex f or mul at i on and dat a col l ect i on met hodol ogy,
i nf or mat i on on
concl udes t hat
i s f easi bl e t o cons t r uc t a r el i abl e i ndex of RAD i nput pr i ces.
br i ef l i st i ng of t he pr obl ems encount er ed may be hel pf ul
a0
due t o a DOD or der cal l i ng f or r et i r ement
r ecor ds af t er t wo year s,
b.
of
however :
const ant
l at i ons - necessi t at ed r epl ac ement of sever al
hel pf ul
necessi t at i ng
vi gi l ance on t he par t of t he Ar my and t he col l ect i on agency
wi t h f r equent wei ght and pr i ce- sampl e r evi si ons.
sect or ,
unnecessar y
Changes i n or gani zat i on - RAD l abor at or i es
under went ext ensi ve r eor gani zat i on dur i ng t he sur vey,
d.
c»
c anc el
r epor t er s i n t he pr i vat e
t o devel op a mor e r epr es ent at i ve sampl e of
e.
l abor at or i es l eadi ng t o di f f i cul t i es i n
f r om t he maj or Ar my
expendi t ur e dupl i cat i ng,
Pr i vat e l abor at or y ex pendi t ur e det ai l
and adequat e wei ght i ng
dat a on over head and ot her cost s wer e di f f i cul t
t o obt ai n»
r ecommended appl yi ng det ai l ed per cent ages of t ot al
cost s f or t he r epor t i ng uni t
f or al l
pr i vat e l abor at or i es
Rei mbur sabl e account s - smal l er
RAD l abor at or i es r ecei ved " r ei mbur sabl e" suppor t
cost
Cont r act
Sampl e met hodol ogy - pr obabi l i t y sampl i ng mi ght be
r epr esent i ng di ver se act i vi t i es,
bead
A
Ti mel ag pr obl em - det er mi ni ng pr i ces on 3- year - ol d i t ems was
di f f i c ul t
f.
it
over head
cont r act s t o t he t ot al
f or t he pr i ced cont r act ( s) .
g.
mat er i al s expendi t ur es)
over head,
I f subcont r act or s«
t he pr i me cont r act or s'
wer e t r eat ed separ at el y,
di st r i but i ons ( l abor , mat er i al s,
over -
Subc ont r ac t i ng - about
25 per cent of pr i vat e RAD was done by subcont r act or s.
char ges ( account i ng f or GO- 57 per cent of
DL5
t he maj or cost
and f i xed f ees)
changed
411
si gni f i cant l y,
year s,
h.
Pr i ci ng - Ar my " s hel f
i t ems" ,
pr i ced f or t hr ee
may not have been r epr esent at i ve but onl y commonpl ace.
new i t ems must
be l i nked t o obt ai n ov er l ap pr i ces,
i.
Ol d and
Spec i f i c at i on
and qual i t y changes - r edesi gn of sophi s t i cat ed RAD devi ces l ed t o
pr i ci ng di f f i cul t i es,
capi t al ,
j.
Capi t al
equi pment
- t he pr i ce mov ement
f or
due t o i t s use ov er a l ong per i od of t i me, may be di f f er ent
t han t hat
f or mat er i al s consumed.
The aut hor r ecommends,
DOD Audi t
i n concl usi on,
t hat f i el d audi t or s of t he
Agency, who mai nt ai n cl ose cont act s wi t h cont r act or s and
l abor at or i es and who al r eady have much
f or dat a col l ect i on.
i nf or mat i on on hand,
be used
As t o met hodol ogy t he r epor t concl udes t hat pr i ce
change i n RAD i nput s must be meas ur ed di r ect l y ( and not t hr ough
secondar y sour ces) ;
gener al ,
but not
t he st udy may be appl i c abl e t o i ndust r y RAD i n
par t i c ul ar l y t o uni v er si t y and nonpr of i t
i nst i t ut i ons;
mor e di ver s i f i ed sampl es ar e needed, wi t h separ at e subi ndexes f or
r esear ch, devel opment ,
cl asses,
academi c i nst i t ut i ons,
geogr aphi c r egi ons,
et c. ;
condi t i ons ( changed t echnol ogy,
af f ect
17.
i ndust r y,
per sonnel
and f ur t her st udy i s needed on ot her
pr oduct i vi t y ,
et c. )
whi ch si gni f i c ant l y
cost s.
" Resear ch and Devel opment Pr i ce I ndexes" by Al l an D.
a.
Des c r i pt i on.
Sear l e,
1966.
Not i ng t he i ncr easi ng i mpor t ance of RAD wi t h
over a $10 bi l l i on expans i on i n expendi t ur es bet ween 1953 and 1962,
Nat i onal
Ar my,
Sci ence Foundat i on,
i n cooper at i on wi t h t he Deoar t ment of t he
f unded t hi s 1966 BLS st udy.
Revi ew ( Jan.
* 66)
t he
I t i s expl ai ned i n Mont hl y Labor
and i n a speech by t he aut hor bef or e t he Amer i c an
4 12
St at i st i cal
As soci at i on ( Aug.
’ 66) „
Pur c hase- pr i ce i ndi ces f or i nput s ar e devel oped f or onl y A my
( about
RAD) ,
10 per cent
of 1964 Feder al
usi ng a sampl e of
RAD,
and 6- 7 per cent
of t ot al
U. S.
23 A my l abor at or i es wi t h pr ogr ammed obl i gat i ons
of $500, 000 or mor e each i n FY61 ( cover i ng vi r t ual l y al l
RAD) ,
PAD
and of 23 ( ' 61- ' 63;
22 i n ' 64- ' 65)
A my i nt r amur al
pr i vat e l abor at or i es hol di ng
" maj or " cont r act s wi t h t he Ar my l abor at or i es ( cover i ng 53 per cent of
FY61 Ar my ext r amur al
RAD) .
I ndex Cons t r uc t i on.
b.
The i ndi ces ar e cons t r uc t ed by usi ng a
modi f i cat i on of t he Laspe. vr es f or mul a wi t h annual
wi t h 1961 expendi t ur es t o cons t r uc t
and 1964 expendi t ur es t o cons t r uc t
pr i ce i ndexes wei ght ed
t he ' 61- ' 63 segment of t he i ndex
t he ' 63- ' 65 segment .
The segment s
f or t he t wo per i ods ar e t hen l i nked t o pr ovi de cont i nuous ser i es f or
i ndex on t he FY1961 base.
each component
I ndi ces ar e cal cul at ed f or f i scal
( 1961 = 100)
l abor at or i es,
wei ght s,
t ot al
and ( 4)
l abor ;
pr i vat e
combi ned Ar my and pr i vat e l abor at or i es wi t h es t i mat ed
mat er i al s,
c o s l s ( suppor t
( 2)
combi ned A my and pr i vat e l abor at or i es sur vey val ue
obl i gat i on wei ght s.
di r ect
( 1) Ar my l abor at or i es,
f or f our cat egor i es:
( 3)
year s 1961 t hr ough 1965
The i ndexes cover f our pr i ce movement s:
suppl i es,
f or Ar my l abs) ;
and equi pment ;
over head and ot her
and f i xed f ees ( f or pr i vat e l abor at or i es
onl y) .
c.
Wei ght s .
The wei ght s ar e obt ai ned f r om expendi t ur e sur veys
submi t t ed by each l abor at or y:
( 1)
For l abor ,
t wo- week payr ol l
( end of June 1961 and 1964) was pr ovi ded f or f our cl asses:
dat a
sci ent i st s
413
and engi neer s,
mat er i al s,
t echni ci ans,
cr af t smen,
and unski l l ed empl oyees»
t he Ar my l abor at or i es r epor t ed t ot al
l i st i ng by t wo- di gi t
code of suf f i c i ent
( 2)
For
expendi t ur es and a
Feder al
Suppl y Cl assi f i cat i on
pr oduct gr oups t o account f or at l east 50 per cent of expendi t ur es and
a sub- l i st i ng of i ndi vi dual
spec i f i ed pr oduct s t o account f or 50 per cent
of each of t he l i st ed br oader c at egor i es „
SI C cat egor i es,
gener al
( 3)
For over head,
t ot al
The pr i vat e l abs used br oad
cost char geabl e t o RAD and t o
and admi ni st r at i ve suppor t was pr ovi ded;
head cost s was sought wi t h " mi xed success. "
pr ovi ded a t ot al
f i gur e f or " f i xed f ees"
( 4)
a br eakdown of ov er
Pr i vat e l abor at or i es
( no expl anat i on) .
Tot al
i ndex wei ght s wer e comput ed by combi ni ng wei ght s r epr esent i ng t ot al
Ar my RAD obl i gat i ons f or pr i vat e and Ar my l abs r at her t han t he t ot al s
f or onl y t he sampl e l abs.
d.
Pr i c i ng.
I n or der t o obt ai n cont i nuous and val i d pr i ci ng dat a
( consi st ent spec i f i cat i ons,
pr i ci ng met hods ar e:
t wo most
( 1)
del i ver y t er ms,
For l abor ,
t echni ci ans,
wage boar d empl oyees,
bot h Ar my and pr i vat e l abs.
et c. ) ,
Ar my l abor at or i es sel ect ed t hei r
common GS gr ades f or pr of essi onal
common GS gr ade f or new empl oyees.
t er ms of sal e,
per sonnel
and t he most
Si mi l ar pr ocedur es wer e used f or
cr af t smen,
and unski l l ed wor ker s i n
Admi ni st r at i ve i ncr eases ar e seen as pr i ce
i ncr eases,
whi l e gr ade r ai ses ar e seen as qual i t y changes.
mat er i al s,
al l
( 2)
For
l abor at or i es r epor t ed on a wi de var i et y of speci f i c
pr oduct s r epr es ent at i ve of t he maj or cost cat egor i es l i st ed i n each
l ab' s base per i od r epor t .
Cost cat egor i es wer e sel ect ed by BLS.
Pr i ci ng met hods f or suppor t and over head wer e es sent i al l y t he same
414
as f or per sonnel
e.
and mat er i al s»
Pr obl ems .
I ndex i s f or i nput s onl y , and i gnor es changes
( 1)
It
i n pr opor t i ons of pr oduct i on mat er i al s and l abor pr oduct i vi t y.
t her ef or e cannot be si mpl y combi ned wi t h f i xed wei ght s t o yi el d an
( 2)
I ndex meas ur es onl y nr i ce change,
out put
pr i ce i ndex.
ef f or t
i n t er ms of t i me i . e. ,
and non- ex pendabl e equi pment
maj or capi t al
i t ems i . e. ,
t echni que was not
t her ef or e not
Pr i c i ng:
ar e not
( 3)
RAD
Expendabl e
di f f er ent i at ed i n c api t al , and
bui l di ngs ar e excl uded.
( 4) Samp! i ng
used i n choosi ng pr i vat e l abor at or i es;
sampl es ar e
r andom and not r epr es ent at i ve of t he t ot al
Wei ght
f.
aver age cost per man/ year .
not
i ndust r y.
( 5)
dat a on over head i s unsat i sf act or y.
Conc l us i on.
The aut hor f eel s t he st udy r eveal s t hat
it
is
f easi bl e t o devel op a r el i abl e RAD pr i ce i ndex .
I S.
" A Sur vey of Sel ect ed Pr i ce I ndi ces Sui t abl e f or Use by t he Cost
Anal ysi s Gr oup" by Rober t D» Der kowi t z
The pur pose of
t hi s document
i s t o pr ovi de a r ef er ence sour ce of
exi st i ng pr i ce i ndi ces f or use by t he Cost Anal ysi s Gr oup»
i s made i n t hi s r epor t
t o devel op an i deal
t he obj ect i ve i s t o show i n pr act i cal
st r uct i on,
set of i ndi ces;
t er ms t he t ypes,
No at t empt
i nst ead,
f or mat ,
con
and char ac t er i st i cs of av ai l abl e i ndi ces t hat may be of
use t o t he cost anal ys t and t o pr ovi de hi m wi t h gui del i nes f or
sel ect i ng and appl yi ng an appr opr i at e i ndex.
I n al l ,
t he exami nat i on uncover ed 13 r el evant
i ndi ces.
desc r i bed and/ or pr esent ed i n t he appendi xes t o t he document
f i ve gener al
I ndi ces,
of
cl assi f i cat i ons as f ol l ows:
cont ai ns descr i pt i ons of
i ndi ces,
These ar e
under
( a) Appendi x A, Gener al
t he t wo basi c and compr ehens ev e set s
publ i shed by t he Bur eau of Labor St at i st i cs,
t hat
cover a
415
wi de r ange of gr oupi ngs of whol es al e mat er i al
ear ni ngs;
pr i ces and hour l y l abor
( b) Appendi x B cont ai ns t he OSD i ndi ces of
commodi t y gr oups f or t he year s 1958- 1969,
i ndex number s ( i nf l at i on f act or s)
t o f ut ur e year s ( 1970- 75) ;
speci f i c i ndust r i es,
t hat
pl us i t s r ecommended composi t e
t o use f or cost est i mat es appl i cabl e
t he r emai ni ng t hr ee appendi ces f ocus on
i s, Appendi x C cont ai ns aer ospace i ndi ces;
Appendi x D shows bui l di ng cons t r uct i on i ndi ces;
shi pbui l di ng i ndi ces.
def ense pr ocur ement
Wher e pr act i cal
appendi ces suppl y suf f i c i ent
and Appendi x E suppl i es
t he i ndex descr i pt i ons i n t he
i nf or mat i on f or t he anal yst
t o use t he
dat a ei t her i n appl yi ng t he i ndex f act or s di r ect l y or i n bui l di ng up
a speci al
pur pose i ndex f r om t he sub- i ndex dat a suppl i ed.
The mai n body of t hi s r epor t
each i ndex i n t he appendi x.
III
i ncl udes a capsul e descr i pt i on of
The capsul e descr i pt i ons appear i n Chapt er
af t er t he di scussi on of I ndi ces i n Gener al
Chant er I V gi ves sever al
examol es of
( i n Chapt er I I ) .
t he wi del y var yi ng r esul t s t hat
can be obt ai ned f r om appl yi ng i ndi ces cover i ng seemi ngl y si mi l ar ar eas.
Chapt er V hi ghl i ght s some of t he l i mi t at i ons i nher ent
i ndi ces and suggest s pr act i cal
cour ses of act i on t o t he anal yst
sel ect i ng a sui t abl e i ndex under di f f er ent
Chapt er VI
t i me const r ai nt s.
suppl i es an exampl e of t he use of component
devel opi ng a composi t e i ndex and t he use of t hat
hi st or i cal
i n avai l abl e
f or
Fi nal l y,
i ndi ces i n
i ndex t o adj ust
cost s.
Two set s of
i ndi ces appear t o he sui t abl e f or use on many cost
anal ysi s pr oj ect s.
One,
pr epar ed by OASD— Syst ems Anal ysi s cover s
maj or def ense commodi t y cl asses f or t he per i od 1958- 196T.
The ot her ,
416
pr epar ed by t he OASD ( Compt r ol l er ) , suggest s " of f i ci al "
adj ust
f act or s t o
f or i nf l at i on by t he commodi t y cl asses f or t he per i od 1969- 1975.
a.
Cener al
I ndi ces
Two of t he i ndi ces exami ned i n connect i on wi t h t hi s st udy cover a
br oad spect r um of commodi t i es and,
headi ng.
hence,
ar e gr ouned under t hi s
Rot h ar e publ i s hed by t he BLS and cont ai n t he basi c st at i st i cs
on whi ch many ot her i ndi ces ar e bui l t .
Thes e t wo i mpor t ant
i ndi ces ar e:
The Whol esal e Pr i ce I ndexes and t he I ndex of Hour l y Ear ni nns .
Br i ef
descr i pt i ons of t hese i ndi ces f ol l ows:
(I )
Whol es al e Pr i ce I ndex ( UPI ) .
2600 commodi t i es.
Host of
Thi s i ndex cover s about
t he pr i ces ar e col l ect ed by mai l
di r ect l y
f r om t he manuf ac t ur er — a f ew ar e r epor t ed by t r ade associ at i ons,
ex changes,
et c.
Thi s i ndex pr ovi des sub- i ndi ces by maj or commodi t y
gr oup and al so a composi t e i ndex f or al l
i t ems ( pr oduct s)
commodi t i es cover ed,
ar e i nt r oduced i nt o t he r epor t onl y when t hey become
wel l - est abl i shed bot h t echnol ogi cal l y and i n t he mar ket .
i t ems t hat
compr i se t he over al l
hi gher sub- i ndi ces,
i . e. ,
UPI
The i ndi vi dual
ar e combi ned succ es si vel y i nt o
t he i ndi vi dual
whi ch i s par t of a subgr oup,
gr oup,
hew
i t em i s par t of a pr oduct cl ass,
whi ch i s a maj or component of t he commodi t y
as i s i l l ust r at ed bel ow:
Commodi t y Gr oup— Met al and . Met al Pr oduct s
Subgr oup— h’onf er r ous Met al s
Pr oduct Cl as s— Mi l l Shapes
I t er n- - Al umi n urn Sheet
The i ndex
i s
cal c ul at ed on t he basi s of a wei ght ed aver age of pr i ce
changes f or al l
cover ed commodi t i es ov er a gi ven per i od of t i me.
The
4 17
wei ght s ar e based on t he shi pment val ue of
t he commodi t y,
pl us t he
val ue of ot her r el at ed commodi t i es not di r ect l y pr i ced but whos e pr i ces
ar e known or assumed t o move si mi l ar l y.
Wher e necessar y t he wei ght i ng
st r uct ur e i s changed about ever y f i ve year s,
i ndust r i al
censuses.
based on dat a f r om
Thi s i ndex may be f ound usef ul
i f t he anal yst
can r el at e hi s r equi r ement s t o an appr opr i at e r epor t ed commodi t y or
commodi t y gr oup but
component s ( e. g. ,
( 2)
t her e i s a not i ceabl e l ack of hi gh t echnol ogy
ai r cr af t ,
mi ssi l es,
r epor t ed.
I ndex of Hour l y Ear ni ngs i n Sel ect ed I ndus t r i es .
BLS publ i shes r epor t s of U. S.
publ i shes annual
r epor t
el ect r oni cs)
Empl oyment and Ear ni ngs mont hl y;
summar i es of t hese st at i st i cs.
The
i t al so
A por t i on of t he
shows t he dol l ar s per hour and t he appl i c abl e i ndex number s f or
Pr oduct i on or Nons uper vi sor y Wor ker s i n Sel ect ed I ndust r i es.
The i ndi ces
ar e pr esent ed i n t er ms of t he l at est y ear as t he base ( t he sampl e i n
t he appendi x shows FY 1963 = 100) .
Sever al
Cl as si f i cat i ons ( SI C)
such as:
ar e i ncl uded,
SI C
372
3721
3723, 9
b.
I ndust r y
Ai r cr af t and Par t s
Ai r cr af t
Ot her Ai r c r af t Par t s and Equi pment
Def ense Pr oc ur ement Commodi t i es I ndi ces
Appendi x B cont ai ns t hr ee set s of
of t he set s appl y t o past year s;
1969- 75.
t i t l es.
hundr ed St andar d I ndust r y
For t hi s r epor t
The f i r st
i ndi ces publ i s hed by OSD.
t he t hi r d appl i es t o t he f ut ur e year s
t hese OSD i ndi ces have been gi ven shor t
set of OSD i ndi ces has been l abel ed " OSD- 1966" ,
y ear of publ i cat i on;
Two
t he second set ,
its
l abel ed " OSD- 1969" desi gnat es i t s
418
y ear of publ i cat i on»
es t i mat es of
The t hi r d set
l abel ed " OSD- 1969- 75" , ar e OSD
A shor t
f ut ur e pr i ce changes.
descr i pt i on of t he t hr ee
set s f ol l ows:
( 1) OSD- 1965.
Thi s set
Har r y Pi ccar i el l o of OASD ( SA) .
har dwar e i t ems,
of i ndi ces was publ i shed i n 1966 by
I t cover s a br oad r ange of mi l i t ar y
gr ouped i nt o set s of l abor and mat er i al
wei ght i ng and mat hemat i cal
ponent s i nt o f i nal
i ndi ces»
combi nat i on of t he l abor and mat er i al
Ear ni ngs Publ i cat i ons.
The mat er i al
These mat er i al
i ndi ces,
of t he met al s i nvol ved,
engi nes,
whi ch r ef l ect
document
onl y pr i ce l evel
wer e devel oped f or seven cat egor i es:
ot her ai r cr af t ,
The
and
pr i ce i ndi ces wer e devel oped f r om
dat a obt ai ned f r om a " Pr i or i t i es Al l ocat i on Syst em"
ai r cr af t
c om
i ndi ces f or each gr oup i s l ef t t o t he anal yst .
l abor i ndi ces wer e ex t r ac t ed f r om t he BLS ser i es of Empl oy ment
614) .
The
mi ss i l es ,
shi ps,
t anks,
( DOD For m
changes
ai r f r ames,
aut omot i ve
and el ect r oni cs»
( 2) OS3- 1969.
Under t hi s capt i on Appendi x B i ncl udes a set
of i ndi ces t hat was publ i shed i n 1969 by t he Economet r i cs Sect i on of
t he OASD( SA)
Resour ce Anal ys i s Of f i ce.
The OSD document ,
t i t l ed " Pr i ce I ndi ces f or Def ense Pr oc ur ement
cl udes a br oad r angi ng set of
i ndi ces t hat
as separ at e l abor and mat er i al
of
i t ems t hat make up most
ar e:
ai r f r ame,
mi ssi l es,
shi ps,
vehi cl es,
Commodi t y Gr oups, "
of DOD pr ocur ement .
avi oni cs,
commodi t y cl asses
The commodi t y cl asses
hel i copt er ai r f r ames,
or dnance and muni t i ons,
communi c at i ons and const r uct i on.
i n
i ncl udes composi t e as wel l
i ndi ces f or 13 gener al
ai r cr af t engi nes,
whi ch i s
el ect r oni cs and
Each of t he mat er i al s i ndi ces
419
r epr esent s 3 wei ght ed aver age of appr opr i at e i ndi ces f r om t he Whol es al e
Pr i ce I ndex.
Labor i ndi ces,
i n gener al ,
ar e based on t he BLS r epor t s
of aver age Hour l y Ear ni ngs of Pr oduct i on Wor ker s.
The const r uct i on
l abor i ndex i s based on aver age hour l y ear ni ngs of wor ker s i n gener al
bui l di ng cont r act cons t r uc t i on and t he cons t r uct i on composi t e i ndex i s
t he Depar t ment of Commer ce' s Composi t e I ndex.
OSD- 1969- 75.
( 3)
Under t hi s capt i on Appendi x B suppl i es a
copy of an OASD— Compt r ol l er Memor andum dat ed August
29,
1969, whi ch
i ncl udes a set of composi t e i ndi ces ( si mi l ar i n cover age t o t hose i n
cl uded i n t he OSD- 1969 i ndi ces,
of
desc r i bed above) .
f ut ur e pr i ce changes ar e t o be used by al l
Thes e OSD es t i mat es
component s of t he
Depar t ment of Def ense i n pr esent i ng es t i mat es of cost s cover i ng t he
I n essence t hese i ndi ces ar e " of f i ci al " OSD
year s 1969 t hr ough 1975.
i nf l at i on f act or s t o i ncl ude t he DOD cost est i mat es.
The ent i r e
memor andum i s r epr oduc ed as a r eady r ef er ence because i t spel l s out
and when t hese i nf l at i on f act or s wi l l
Co
be used.
Aer ospac e I ndi ces
Appendi x C descr i bes t hr ee i ndi ces t hat
t echnol ogi es;
f ocus on aer ospace
each i s br i ef l y char ac t er i zed bel ow under a capt i on t hat
desi gnat es i t s sour ce and base year .
t he r eader t hat
si gni f i c ant
( cover ed i n Appendi x B)
( 1)
I n addi t i on,
Campbel l .
Appendi x C r emi nds
por t i ons of t he wi de- r angi ng OSD i ndi ces
i ncl ude i ndi ces f or aer ospace t echnol ogi es.
RAND ( I 960 - 1QQ) .
Under t hi s capt i on i s gr ouped a set
of suggest ed pr i ce i ndi ces pr es ent ed i n an i nt er nal
by H. 0.
how
I n al l ,
RAND wor ki ng paper
t he RAND wor k i ng paper suppl i es si x i ndi ces
420
ai r c r af t
pur chased equi pment ,
ai r c r af t
pr i ce, mi ss i l e and spacecr af t ,
accessor i es pr i ce.
ment i oned,
ai r cr af t mat er i al s,
ai r cr af t over head,
el ec t r oni c component
and
I n bui l di ng up t he i ndi ces f or t he si x cat egor i es
RAND used wei ght ed combi nat i ons of t he f ol l owi ng component
i ndi ces:
( a) ^ aw mat er i al s .
f r om wei ght ed pr i ces f or ei ght
( e. g. ,
f i ni shed st eel ,
A r aw mat er i al
i ndex was devel oped
sel ect ed cat egor i es of r aw mat er i al
al umi num ext r usi ons wi r e)
dr awn f r om t he
Whol es al e Pr i ce I ndex.
( b) Annual
For t hi s component
cover i ng annual
RAND used Bur eau of Labor St at i s t i cs r epor t s
aver age hour l y ear ni ngs f or pr oduct i on wor k er s engaged
i n t he f ol l owi ng t ypes of
Engi ne Par t s,
Aver age Hour l y Ear ni ngs — Pr oduct i on Wor k er s .
i ndust r i es:
Ot her Ai r c r af t
Sc i ent i f i c I nst r ument s,
Ai r c r af t ,
Par t s and Equi pment ,
Ai r c r af t
Engi nes and
Engi neer i ng and
Gui ded Mi ssi l es and Spac ecr af t ,
and El ect r i cal
Component s and Ac cessor i es.
( c) Ov er head Rat es .
annual
Some of t he i ndi ces i ncl ude an
i ncr ease of t wo per cent or t wo and one- hal f per cent — chosen
s omewhat ar bi t r ar i l y— f or over head.
( 2)
by R.
E.
Leach,
Gener al
Resear ch Cor por at i on ( 1 %G = 100) .
publ i s hed by Gener al
Resear ch Cor por at i on ( GRC) ,
r esul t of an ex ami nat i on of si x maj or ai r cr af t
mi s s i l e pr ogr am.
The r epor t
El ect r i cal
Equi pment ) .
i s t he
pr ogr ams and one
suppl i es f our component
Sc i ent i f i c and Engi neer i ng Labor ,
Thi s i ndex,
Pr oduct i on Labor ,
i ndi ces ( i . e. ,
Met al s and Har dwar e
Thes e component s ar e gi ven equal
wei ght
( 25 per
421
cent )
i n t he f i nal
composi t e i ndex.
f r om secondar y sour ces
( i . e. ,
Dat a f or t he i ndex was obt ai ned
t he pr oduct i on l abor component was
obt ai ned f r om t he gr oss hour s and ear ni ngs ser i es f or pr oduct i on wor k er s
i n t he ai r c r af t
i ndust r i es,
publ i s hed by BLS;
t he Sc i ent i f i c and
Engi neer i ng Labor component was dr awn f r om a sur vey of Pr of essi onal
and Sc i ent i f i c Sal ar i es devel oped by Los Al amos Sci ent i f i c Labor at or y
of t he Uni v er si t y of Cal i f or ni a;
t he mat er i al s component
was dr awn f r om
appr opr i at e BLS st at i st i cs. )
( 3)
Bo o z - AHe n ( 1963 = 100) .
I n t hi s Booz- Al l en Appl i ed
Resear ch Cor por at i on cost anal ysi s st udy of t he Super soni c Tr anspor t ,
t hr ee maj or subsyst ems wer e est abl i shed:
avi oni cs.
For each of t hese subsyst ems,
ai r f r ame,
mat er i al s and l abor i ndi ces
wer e obt ai ned and a wei ght ed aver age t ot al
st udy uses secondar y sour ce dat a;
i . e. ,
engi nes and
cost i ndex was made.
The
t he RAND i ndex was used as t he
sour ce f or t he ai r f r ame mat er i al s i ndex and t he OSD i ndex f or t he
engi ne and avi oni cs mat er i al s.
descr i bed,
a wei ght ed aver age pr i ce i ndex was t hen devel oped f or each
of t he maj or subsyst ems»
f i nal
Fr om t he mat er i al s and l abor i ndi ces
The wei ght s f or l abor and mat er i al
i ndex ar e based on t he annual
i n t he
r at i os of cost s of mat er i al s t o t he
cal cul at ed val ue of shi pment s.
d.
Bui l di ng Cons t r uct i on I ndi ces
Four separ at e cons t r uct i on i ndi ces ar e pr es ent ed i n Appendi x D.
Thes e f our i ndi ces wer e di scussed and compar ed i n a doct or al
t i t l ed " St at i st i cal
di ss er t at i on
Cost Es t i mat i ng Rel at i onshi ps f or Bui l di ng Const r ue-
422
t i on Pl anni ng" by Joel
Tu ma r k l n J /
The comment s whi ch f ol l ow ( and t hose
i n Appendi x D) ar e ei t her par aphr ases of or quot es f r om t he Tumar ki n
wor ko
( 1)
t hr ough 19C8) .
canal s,
I ndex ( 1947
Bur eau of Recl amat i on Const r uct i on Cost
El even cat egor i es of cost s,
such as dams,
pumpi ng pl ant s,
et c 0, wer e used i n cons t r uc t i ng t hi s composi t e i ndex t hat
based on publ i c wor k cost s ( mat er i al
is
and l abor suppl i ed by bot h t he
cont r act or and t he gover nment ) .
( ?) Bur eau of Publ i c Roads,
12£Zl «
i ndex,
Thi s publ i shed i ndex,
Hi ghway Const r uc t i on I ndex ( 1951-
i n addi t i on t o suppl yi ng a composi t e
al so suppl i es a separ at e i ndex f or t he st r uct ur es bui l t
in
connect i on wi t h hi ghway const r uct i on.
Dacy I nput - Pr oduc t i vi t y Const r uct i on Cost
( 3)
Thi s i ndex goes beyond t he Bur eau ser i es ( i n Ber kowi t z' s vi ew)
I ndex ( 1347- 07
i n bot h
concept and compl exi t y by adj ust i ng f or changes i n pr oduct i vi t y ( r eal
out put
per man- hour )
as wel l
as t he di f f er ent i al
bet ween act ual
pr i ces
pai d by t he cont r act or ver sus t he quot ed wage r at e and whol es al e
mat er i al s pr i ces.
The mat er i al s i ndex i s der i ved f r om t he const r uct i on
por t i on of t he Whol es al e Pr i ce I ndex;
of a 1947 I nput - Out put St udy,
l abor cost s ar e based on r esul t s
whi ch showed t hat
cer t ai n t ypes of l abor
wor k ed an aver age of 14. 5 per cent mor e t han t hose i n t he aver age
ar e a i so pr esent ed i
Es t i mat i ng Rel at i onshi ps f or Bui l d
t or Def ense Anal yses, Cost Anal ysi s Gr oup,
Vi r gi ni a, 19GC) .
I DA St udy S- !
423
const r uc t i on f i r m;
of " Tot al
census dat a wer e used t o obt ai n an unadj ust ed val ue
Cons t r uc t i on- i n- Pl ace" ,
whi ch i n t ur n was used as a bui l di ng
bl ock i n obt ai ni ng t he Dacy I nput - Pr oduc t i vi t y I ndex.
( 4)
Composi t e Commer ce Const r uct i on Cost
Thi s i ndex i s publ i shed by U. S.
Def ense Ser vi ces Admi ni st r at i on,
1915- 1966.
Depar t ment of Commer ce,
Busi ness and
under t he t i t l e Const r uct i on St at i st i cs
Thi s composi t e Commer c e i ndex i s i ncl uded i n t he t abl e
t i t l ed " Compar i son of Cons t r uct i on I ndi ces"
c.
I ndex ( 1915- f l 6) .
i n Appendi x C.
Shi pbui l di ng I ndi ces
Appendi x E i ncl udes onl y one set of Shi pbui l di ng I ndi ces,
but
it
does make r ef er ence t o t he shi pbui l di ng por t i on of t he br oad- r angi ng
OSD i ndi ces,
descr i bed i n Appendi x B.
The shi pbui l di ng i ndi ces,
cr i bed i n Appendi x E ( and i n t he synopsi s bel ow) ,
speci al
cost st udy by Resour ce Management
ar e t he r esul t of a
Cor por at i on ( RMC)
t owar d devel opi ng cost es t i mat i ng r el at i onshi ps f or naval
( 1)
RMC I ndi c es .
and Smi t h.
posi t e i ndex t i t l ed " Shi pbui l di ng Cost
Cost
I ndex" .
di r ect ed
shi ps.
Thr ee shi pbui l di ng i ndi ces ar e pr esent ed i n
a st udy by RMC, done by Dei Rossi
shi pbui l di ng component
des
The f i r st
I ndex" ;
i ndi ces t i t l ed " Real
i ndex i s a com
t he second and t hi r d ar e
Wage I ndex"
and " Mat er i al s
These i ndi ces ar e based es s ent i al l y on aggr egat e shi p
bui l di ng dat a r epor t ed by t he Bur eau of t he Census i n i t s r epor t s of
shi pbui l di ng manuf act ur er s;
by OSD ( i oe. , OSD- 1966,
however ,
a mat er i al s or i ce i ndex publ i shed
descr i bed i n Appendi x B) was al so used.
424
A P P EN D I X
A
Th i s
Bureau
ap p e n d ix
d e s c r ib e s
purchases
c o n s tr u c te d
d e s c r ib e d
in
fo l l o w i n g
s te p s :
th e
Fe d e r a l
i m p l i c i t
d e fl a t o r s
governm ent
summed
d o l l a r
is
d e r i v a t i o n
s u m m a r i ze s
as
o n l y
th e
Fi n a l l y ,
d e f l a t o r
f o r
Ec o n o m i c
An a l y s i s
( B EA ) .
i m p l i c i t
p r i c e
t h i s
f o r
d e f l a t o r ,
purchases
averages
o f
term s
goods
are
in d exes
o f
in
d efen se
d efen se
d e r i ve d
and
As
by
th e
s e r vic e s
by
d is a g g r e g a te d .
t h a t
in d exes
d e t a i l
t o t a l
D e f l a t o r
th e
d o l l a r
w ith
s e r i e s
d e f l a t o r
f o r
V I -B -2
is
t h a t
o f
d o l l a r
Ex h i b i t
c a te g o r y
n o t
e x i s t i n g
and
t e x t
c o n s i s t e n t
d id
So u r c e s
th e
a
r e s u l t s
c o n s ta n t
i m p l i c i t
In
p r o vid e
s e r ie s
e xc e p t i o n s ,
A.
(3 )
o f
d efen se
w eig h te d
d e t a i l
an
c u r r e n t
De fe n s e
a re
o f
th em selves
p r ic e s
c o n s ta n t
(2)
in
d o l l a r
purc hases
in
th e
Ea c h
o fte n
non
term s
c o n s ta n t
te rm s.
i t s
w ell
o r
m ore
is
d e fl a t e d
s e c t o r .
to
Th is
and
i s
in
An a l y s i s
Bureau
t h i s
To ta l
Go v e r n m e n t
in
th e
V I ,
( 1)
c a te g o r y
is
a t
Ch a p te r
d e t a i l e d
Ec o n o m i c
o f
VI-B
i n v o l v e
B EA
a
m ajo r
e f f o r t .
e s tim a te s
each
n a tio n a l
s t a t i s t i c s
t h i s
o f
income
re se arc h
w ere
Th e
a c c o u n tin g
e f f o r t .
u sed .
Fe d e r a l
W ith
Ex h i b i t
e x h i b i t
shows
d efen se
c o n c e p ts ,
few
VI-B -1
c u r r e n t
purchases
and
as
th e
y e a r .
De r i v a t i o n
p re se n ts
fo l l o w s , th e
b r i e f l y
w i th
o f
Cu r r e n t
th e
19 72
sourc e
d e s c r ib e d .
D o l l a r
d e t a i l e d
and
W eights
c u r r e n t
d e r i v a t i o n
o f
d o l l a r
each
w e i g h ts .
d is a g g r e g a te d
425
EX H I B I T
VI-B -1
Cal endar
Year
1947 - - - - - 1948 . . . . . .
1949 - - - - - 1950 . . . . . 1951 - - - - - 1952 - - - - - 1953 - - - - - 1954 . . . . . .
1955 . . . . . .
1956 — . . . .
1957 . . . . . .
1958 . . . . . .
1959 . . . . . .
1960 . . . . . . - - 1961 . . . . . .
1962 . . . . . .
1963 . . . . . .
1964 . . . . . .
1965 . . . . . ■
1966 - - - - - 1967 . . . . . - - 1968 . . . . .
1969 . . . . .
1970 - - - - - - - 1971 . . . . . - - 1972 . . . . .
D EFL A T O R
FO R
FED ER A L
D EFEN S E
P U R C H A S ES
Def ense
Pur chases
Const ant
1950 Dol l ar s
9, 071
13, 533
15, 412
17, 841
18, 243
41, 810
56, 520
61, 236
50, 014
44, 644
43, 753
45, 999
45, 902
44, 995
43, 058
45, 521
49, 134
47, 408
44, 867
43, 904
51, 717
61, 053
63, 094
59, 413
51, 630
45, 194
43, 857
13, 268
33, 58. 4
41, 198
A4, 225
46, 049
44, 946
51, 582
72, 354
74, 588
71, 560
74, 371
I n. pl i ci t
Def l at or
67. 0
69. 6
74. 4
77. 2
80. 2
81. 3
79. 5
82. 4
86. 4
92. 2
96. 1
100. 0
102. 3
104. 4
105. 1
105. 0
107. 1
111. 4
114. 2
117. 3
118. 5
124. 1
132. 0
144. 5
158. 3
169. 6
426
EXHI BI T VI - B- 2 - NATI ONAL DEFENSE PURCHASES,
( $ Mi l l i on)
Tot al
Compensat i on
Mi l i t ar y Ci vi l i an -
1972
74, 371
on °
22, 43C
13, 452
St r uct ur es - - - - - - - - - - - - - - - - - - - - - - - - - - - - - New c ons t r uc t i on- - - - - - - - - - - - - - - - - - - - - Mi l i t ar y f aci l i t i es - - - - - - - - - - - - - - - - Mi l i t ar y hospi t al s - - - - - - - - - - - - - - - - - I ndust r i al - - - - - - - - - - - - - - - - - - - - - - - - Resi dent i al - - - - - - - - - - - - - - - - - - - - - - - - Less:
For ce account compensat i on - - - Pl us:
Pur chases of ex i s t i ng st r uct ur es
Al l
ot her pur chases - - - - - - - - - - - - - - - - - - - - - .
Mi l i t ar y equi pment - - - - - - - - - - - - - - - - - - - Ammuni t i on - - - - - - - - - - - - - - - - - - - - - - - - - - - Fuel - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Pur chases f r om abr oad - - - - - - - - - - - - - - - - St oc kpi l i ng and def ense pr oduct i on - - Less:
Sal es of mi l i t ar y pr oper t y - - - Ot h e r - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Tr avel and t r anspor t at i on of per sons
Tr anspor t at i on of t hi ngs . . . . . . . . . .
Rent , communi cat i ons, and ut i l i t i es Pr i nt i ng and r e pr oduc t i on- - - - - - - - - - Ot her ser vi ces - - - - - - - - - - - - - - - - - - - - - Suppl i es and mat er i al s - - - - - - - - - - - - - Equi pment - - - - - - - - - - - - - - - - - - - - - - - - - - -
2, 044
1, 797
1, 054
66
534
1/ 13
76
323
36, 429
17, 170
2 ,0
%
*5- -
1
°
~
1,021
36
425
14, 480
591
770
350
82
6, 514
5, 060
613
427
1.
Co m p e n s a tio n
Fe d e r a l
wages
d efen se
and
s a l a r i e s
and
personnel
em ployed
by
p r i n c i p a l l y
th e
a .
Co as t
Ato m ic
wages
De p a r tm e n t
Wages
m i l i t a r y
by
s e r vi c e
and
d e fe n s e -r e l a t e d ;
a tte m p t
is
m ade
t h i s
n e c e ssary
is
to
b .
a d j u s t
and
ag en c ies
Ad j u s tm e n ts
was
w ere
n o t
in c lu d e d
in
th e
p a y r o l l s
e n t e r
p a y r o l l s
a v a i l a b l e
was
m ade
o f
m i l i t a r y
De fe n se
in
and
th e
( D OD )
s a l a r i e s
bu d get
and
and
and
one
w i l l
see
d ata
to
d e t a i l
and
are
a re
Ex p e n d i t u r e s
o f
c i v i l i a n
d e fe n se
a g e n c ie s ,
f o r
t h a t
a d j u s te d
th e
th e
from
to
Co as t
th r o u g h o u t
e xc lu d e
was
o b ta in e d
Gu a r d
t h i s
Co as t
e xc lu d e
are
n o t
e f f o r t
Gu a r d ,
an
i f
a v a i l a b l e .
Sa l a r i e s
c i v i l i a n
p a y r o l l
o b ta in e d
from
to
e xc lu d e
in
th e
th e
Un ite d
C i v i l
Sta te s
Se r vi c e
th e
Pa y r o l l s
Fe d e r a l
in c lu d e
(Th e s e
under
ac c ou n ts
to
c om pen sation
are
governm ent
ac c ou n ts
in
d e fe n s e -
Co m m i s s i o n
governm ent
in c lu d e
pay
o f
o th e r w is e
p a y r o l l s
o f
t h e i r
(CSC).
Gu a r d
o b ta in e d
from
CSC
S.
c i t i ze n s
A
pay
th e
i s
em ployed
n o t
th e se
e n t e r p r i s e );
and
e s t i m a t e s ,
when
f i n a l
and
governm ent
te c h n i c i a n s
budget
b u d g e t.
o f
o f
from
th e
naval
i n s t e a d ,
are
fro m
U.
and
d e f i c i t
Na tio n a l
Gu a r d
are
o r
o f
em ployees
p u rc h a s e s ;
s u r p lu s
Na tio n a l
em ployees
e m p loyees,
th e
o f
o f
c o n s id e re d
in
e n t e r p r i s e s
s e p a r a t e l y ,
to
wages
Wages
general
(2)
p a y -i n -k i n d .
o f
b oth
com posed
Sa l a r i e s
sou rc e
p o s t-e xc h a n g e s .
e n t e r p r i s e s ,
f o r
are
m ade:
( 1)
m i l i t a r y
and
p ro p e r
C i v i l i a n
To t a l
r e l a t e d
i f
c om pensation
Co m m is s io n .
s a l a r i e s .
c o n s id e re d
f o r
su pplem ents
En e r g y
M i l i t a r y
l i s t i n g s
Gu a r d
wage
th e
To ta l
d e t a i l e d
e xp e n d itu r e s
th e y
and
are
a d ju s tm e n t
428
o ve r s e a s
two
b y
Fe d e r a l
s t e p s :
f i r s t ,
by
agenc y
to
d e fe n s e ;
p a y r o l l
th e
d efen se
was
d ata
used
to
second
fi g u r e
f o r
Fe d e r a l
p o r t i o n
o f
Wage
in s u ra n c e
De p a r tm e n t
d efen se
Th e
in
m i l i t a r y ,
t h i s
was
c i t i ze n s
th en
are
each
fo l l o w i n g
m i l i t a r y
Li f e
and
Th is
and
supplem ents
Go v e r n m e n t
supplem ents
( OAS D H I )
Ed u c a t i o n
th e
( 1)
made
o f
in
U .S .
c i t i ze n s
em ploym ent
a p p lie d
o ve rse as
to
to
a l l o c a b l e
a
t o t a l
e s tim a te
p a y r o l l ,
b e n e f i t s .
c l a s s i f i c a t i o n s ,
p o r ti o n s
o f
p r o p o r ti o n
o f
was
em ploym ent
p r o p o r ti o n
em ploym ent
In su ran c e
H e a l t h ,
Ad m i n i s t r a t i o n .
e s ti m a te
o ve rse as
t h i s
governm ent
r e ti r e m e n t
o f
Th i s
Su p p le m e n ts
Ho s p ita l
and
on
th e
s t e p ,
t h i s
Ge n e r a l
D i s a b i l i t y ,
CSC
e s tim a te
th e
c .
c i v i l i a n
from
in
d efen se
a g e n c ie s .
in c lu d e
o th e r
CSC,
d i vi d e d
f i r s t
i s
d i vi d e d
Ag e ,
governm ent
in fo r m a ti o n
W e l fa r e ,
Ol d
i s
and
sponsored
s u p p lie d
th e
i n t o
i n t o
S u r v i v o r s ,
by
th e
Ve te ran s
m i l i t a r y
d efen se
and
and
non
w ay:
supplem ents
In s u ran c e
and
a re
pay
com posed
o f
o f
OASDHI -
m i l i t a r y
r e s e r v i s t s
c a t e g o r i e s ;
(2 )
c i v i l i a n
supplem ents
(3 )
n o n -d e fe n s e
a re
s im p ly
th e
r e s id u a l
c a t e
g o r i e s ;
Co as t
(based
Gu a r d
on
m i l i t a r y
th e
wages
n o n -d e fe n s e
wages
and
and
a re
e s tim a te d
p r o p o r ti o n
o f
s a l a r i e s ) ,
(4 )
c i v i l i a n
s a l a r i e s
as
Co as t
and
c a te g o r i e s
th e
a
su pplem ents
p e rc en tag e
Gu a r d
wages
r e s id u a l
su pplem ents
a c c o rd in g
a l r e a d y
m i l i t a r y
to
a l l o c a t e d
th e
to
i s
are
o f
th o se
m i l i t a r y
and
s a l a r i e s
d efen se
d i vi d e d
p r o p o r ti o n
d e fe n s e .
a r e
o f
th e
supplem ents
in
m i l i t a r y
i n t o
o f
th e
su p p lem en ts;
d efen se
Fe d e r a l
t o t a l
and
c i v i l i a n
429
Str u c tu r e s
2 .
De fe n s e
e x i s t i n g
a s s e t s ;
c o n s id e re d
a
f a c i l i t i e s
Fe d e r a l
by
some
because
o f
exc lu d e
Th e
e s tim a te s
based
on
o f
do
va lu e
and
n o t
is
i n
do
n o t
s u p p ly
fi g u r e
i s
a g e n c ie s .
e s ti m a t e s ;
from
c o n s tr u c ti o n
Fe d e r a l
i s
M i l i t a r y
Th is
is
I t
r e s i d e n t i a l ,
c i v i l
and
i n d u s t r i a l
h o s p i t a l s
are
in c lu d e d
19 6 6 - 19 72 ,
w h ic h
o f
is
a re
A
n o t
o r
few
c o n c e p t,
agen c ies
Th e
u sin g
w ith
e s tim a te s
b u d get
a p p r o p r i a ti o n s
o f
r e p o r te d
e i t h e r
e xp e n d itu r e s
by
f o r
d ata
fa c t o r s
sm all
m o n th ly
by
w i t h o u t
d ata
i n c l u d e d .
r e q u ir e d
Bureau
u s e d ,
Ho w ever,
owned
c o n s t r u c t i o n
s e r i e s
d a ta
th e
fo l l o w i n g
ite m s :
re c o rd e d
e x c l u s i v e
o f
by
by
ag en c y.
Fa c i l i t i e s
fi g u r e
a l l
w hic h
Ce n s u s
Ce n s u s
com posed
f a c i l i t i e s .
p e r io d
in c lu d e s
th e
d ata
th e e s tim a te s
as
program s
purc hases
Fe d e r a l l y
v a l u e -i n -p l a c e
a d j u s te d
i n d i v i d u a l
M i l i t a r y
th e
agen c ies
th e
( 1)
to
o f
to
p u t -i n -p l a c e .
are
by
new
r e p o r te d
s e r vi c e s
p r o vid e d
De fe n se
m o n th ly
e n g in e e r in g
th e se
and
c o m p e n sa tio n ,
c o n s t r u c t i o n
cases
va lu e
in c lu d e d
b y
th e
new
c onform
r e p o r te d
p r o r a ti n g
c o n s tr u c ti o n
ac c ou n t
s u p p lie d
m ost
m easures
agen c ies
o f
d ata
In
new
c o m p e n satio n ,
Co n s tr u c ti o n
as
a r c h i t e c t u r a l
fo r c e
em ployee
a g e n c y.
la n d
in c lu d e
Ne w
a r e
a d j u s tm e n t,
th e y
p a r t
a .
each
s t r u c tu r e s
De p a r tm e n t
d e t a i l s
i n
o f
De fe n se
c o n s t r u c t i o n
m i l i t a r y
t h i s
fi g u r e
Co a s t
Gu a r d
c o n s tr u c ti o n
in c lu d e d
f a c i l i t i e s ,
s e p a r a t e l y .
in
e xc l u d in g
o th e r
e xc e p t
c a t e g o r i e s .
f o r
th e
430
( 2)
I ndust r i al
Const r uct i on i n t hi s cat egor y i ncl udes manuf ac
t ur i ng and pr ocessi ng bui l di ngs as wel l
as ar senal s, or dnance wor ks, shi p
yar ds and f aci l i t i es const r uct ed by t he At omi c Ener gy Commi ssi on.
( 3)
Resi dent i al
Thi s f i gur e i ncl udes new f ami l y housi ng uni t s
const r uct ed f or t he ar med ser vi ces and r ehabi l i t at i on of exi st i ng mi l i t ar y
f ami l y housi ng uni t s.
For ce Account Compensat i on
b.
An adj ust ment i s made t o t he est i mat e of new const r uct i on
i n or der t o avoi d doubl e count i ng of compensat i on pai d f or ce account empl oyees,
t hat i s,
t ur es.
Feder al
empl oyees engaged i n const r uct i on of Feder al l y owned st r uc
( As not ed above, t hi s compensat i on i s i ncl uded under ci vi l i an com
A smal l
pensat i on. )
per cent age i s t aken of each cat egor y of new const r uc
t i on ( var yi ng wi t h t he t ype of const r uct i on) , and t hese number s ar e summed
t o pr ovi de an est i mat e of t hi s adj ust ment .
These per cent ages ar e based
on dat a f r om BEA' s I nt er i ndust r y Economi cs St udy f or t he year 1958.
c.
Pur chase of Exi st i ng Asset s
Pur chase of exi st i ng r esi dent i al
st r uct ur es i s est i mat ed
f r om unpubl i shed dat a f r om t he Vet er ans Admi ni st r at i on and f r om t he FHA
publ i cat i on " Summar y of Mor t gage I nsur ance Oper at i ons. "
nonr esi dent i al
The f i gur e f or
st r uct ur es i s est i mat ed f r om t he GSA " Repor t s on Excess
and Sur pl us Real
Pr oper t y. "
I n bot h cases
20 per cent of each f i gur e i s
consi der ed as l and pur chases and i s deduct ed.
431
3.
Al l
Ot her Pur chases
The f ol l owi ng cat egor i es make up t he def ense por t i on of ot her
pur chases:
Mi l i t ar y Equi pment ,
Ammuni t i on,
St oc kpi l i ng and Def ense Pr oduct i on,
Fuel ,
Net Pur chases f r om Abr oad,
Sal es of Mi l i t ar y Pr oper t y
and Ot her
Pur chases.
Mi l i t ar y Equi pment
a.
Thi s i t em was est i mat ed wi t h dat a obt ai ned f r om sever al
sour ces.
I ncl uded f r om DOD “ St at us of Funds"
r epor t s under DOD ex pendi
t ur es f or pr oc ur ement wer e f i gur es i n t he f ol l owi ng cat egor i es,
cr af t ,
mi ssi l es,
shi ps,
t r acked combat vehi cl es,
or dnance,
ai r
vehi cl es and
r el at ed equi pment ,
el ect r oni cs and communi cat i ons
Thi s l ast r esi dual
cat egor y was br oken down at CEA i nt o i nst r ument s,
i ndust r y machi ner y,
const r uc t i on equi pment ,
and ot her pr ocur ement .
el ect r i cal
equi pment and met al
wor k i ng equi pment cat egor i es , based on movement each y ear of a di st r i but i on
cal cul at ed on 1958 dat a.
The f i gur es f or ai r cr af t ,
mi ssi l es,
and or dnance
wer e adj ust ed t o excl ude t he ammuni t i on f i gur e, di s cussed bel ow, i n or der
t o al l ow separ at e det ai l i ng of t hi s i t em.
Fi gur es f or pr oc ur ement under
t he mi l i t ar y assi st ance pr ogr am ar e added t o each of t he cat egor i es l i st ed
Dat a f or t hese est i mat es ar e cur r ent l y obt ai ned f r om t he Compt r ol l er
a b o ve .
of DOD,
Fi nance and Ac count i ng Di vi si on publ i c at i on " Mi l i t ar y Assi st ance
Pr ogr am Appr opr i at i on St at us" .
Fi nal l y,
an est i mat e i s made of pr oc ur ement of equi pment f or Oper at i on
and Mai nt enanc e ( O&M) .
Thi s i t em, whi c h i s added as a si ngl e f i gur e,
composed of budget cat egor i es 31 ( Equi pment )
is
and par t of 26 ( Suppl i es and
Mat er i al s) under O&M by ser vi ce and def ense agency i n t he budget
appendi x.
432
b.
Ammuni t i on
Thi s f i gur e i ncl udes al l
mi l i t ar y ammuni t i on except
mi ssi l es and was composed of dat a by ser vi ce under t hi s cat egor y i n t he
DOD pr ocur ement sect i on of t he budget appendi x.
c.
Fuel
Fi gur es on f uel
wer e der i ved f r om dat a by ser vi ce on
DOD st ock f unds i n t he budget appendi x.
Net Pur chases Fr om Abr oad
Thi s f i gur e i s cal cul at ed as i mpor t s mi nus expor t s wi t h
f i gur es made avai l abl e by DOD and def ense agenci es.
On t he i mpor t si de
t he account measur es di r ect def ense expendi t ur es f or f or ei gn goods and
ser vi ces by t he def ense agenci es.
I ncl uded ar e f or ei gn expendi t ur es of
U. S.
cont r act or s hi r ed by t he Feder al
U. S.
f or ei gn mi l i t ar y i nst al l at i ons and var i ous out l ays abr oad f or admi ni -
Gover nment t o const r uct and oper at e
st r at i on of t he mi l i t ar y assi st ance pr ogr am.
The account on t he expor t si de measur es del i ver y of goods and t r ansf er
of ser vi ces by mi l i t ar y agenci es t o f or ei gn gover nment s under sal es cont r act s
Del i ver y of goods r ef er s t o t r ansf er of goods, ei t her f r om t he Uni t ed St at es
or f r om U. S.
i nst al l at i ons abr oad t o f or ei gn gover nment s.
Al so i ncl uded
ar e sal es of excess pr oper t y of i nst al l at i ons abr oad and l ogi st i cal
pr ovi ded t o U. S.
al l i es abr oad.
Excl uded, however ,
sol d di r ect l y t o f or ei gner s by pr i vat e f i r ms.
suppor t
i s mi l i t ar y equi pment
433
e.
St ockpi l i ng and Def ense Pr oduct i on
The st ockpi l i ng of cr i t i cal
t hi s f i gur e,
an ac t i vi t y of Gener al
Ser vi ces Admi ni st r at i on ( GSA) , wer e
es t i mat ed by t he f ol l owi ng pr ocedur e:
y ear basi s i s cont ai ned i n t he det ai l
ar t i cl es.
Dat a on st ockpi l i ng on a f i scal
of GSA " Pr oper t y Management "
Usi ng budget dat a desi gnat i ons,
def ense i s cal cul at ed.
mat er i al s por t i on of
a pr opor t i on al l ocabl e t o
Thi s pr opor t i on i s appl i ed t o t he " Ot her " cat egor y
under GSA " Pr oper t y Management "
i n t he " Mont hl y Tr easur y St at ement
( MTS) .
To t he r esul t of t hi s cal c ul at i on i s added t he ot her cat egor i es i n t he
MTS under GSA " Pr oper t y Management , "
r el at ed i n t he budget as wel l .
si nce t hey ar e desi gnat ed as def ense-
Dat a on ex pendi t ur es of Def ens e Pr oduc t i on
Admi ni st r at i on i s obt ai ned f r om unpubl i s hed GSA dat a.
f.
Sal es of Mi l i t ar y Pr oper t y
The adj ust ment made f or sal e of def ens e- r el at ed
gover nment pr oper t y was made wi t h f i scal
y ear dat a f r om t he annual
Tr easur y publ i cat i on " Combi ned St at ement of Recei pt s,
Bal ances of t he Uni t ed St at es Gover nment . "
sour ce wer e added t o mak e t hi s est i mat e:
and Cr i t i cal
Expendi t ur es and
Two i t ems under r ecei pt s by
Pr oceeds of Sal es f r om St r at egi c
St oc kpi l e and Pr oceeds of Sal es of
Scr ap and Sal vage Mat er i al s
Cal endar year es t i mat es wer e made by av er agi ng t wo f i scal
g.
y ear f i gur es.
Ot her
As a f i nal
st ep,
a r esi dual
cat egor y of
pur chases
was br oken down i nt o t he f ol l owi ng budget obl i gat i ons by obj ec t cl ass
cat egor i es ( gi ven wi t h budget cat egor y number ) :
434
21
Tr avel
22
Tr anspor t at i on of t hi ngs
23
Rent ,
24
Pr i nt i ng and Repr oduct i on
25
Ot her Cont r act ual
26
Suppl i es and Mat er i al s
31
Equi pment
and Tr anspor t at i on of Per sons
Communi cat i ons and Ut i l i t i es
Ser vi ces
One of t hr ee met hods was used f or t hi s br eakdown:
( 1)
FY 1964- 1972,
obl i gat i ons by obj ect out si de t he Feder al
f ound i n t he Tr easur y bul l et i n.
f or di st r i but i ng t he r esi dual
Fi r st ,
however ,
Gover nment
t he sour ce f or t hi s per
f or nat i onal
def ense
Wei ght s wer e cal cul at ed f r om t hi s dat a
among t he budget cat egor i es l i st ed above.
t hr ee adj ust ment s wer e made i n an ef f or t
t o avoi d doubl e
count i ng of mi l i t ar y equi pment and ot her speci f i c pur chases al r eady es t i
mat ed.
Fi r st ,
cent age of
Feder al
cat egor y 31, equi pment ,
t ot al
r esi dual
Second,
Feder al
equi pment
was es t i mat ed separ at el y as a per
( based on t he pr opor t i on of
pur chases al l ocabl e t o def ense) .
an es t i mat e of pur chases f or r esear ch and devel opment was
deduct ed f r om cat egor y 25,
ot her ser vi ces.
Thi s f i gur e i s es t i mat ed f r om
unpubl i s hed dat a f r om t he Census Bur eau on Feder al
t he sum of
t ot al
t he ammuni t i on,
f uel ,
Fi nal l y,
and pur chases f r om abr oad cat egor i es was
subt r act ed f r om t he f i gur e der i ved f or cat egor y 26,
wer e cal cul at ed.
gr ant s- i n- ai d.
bef or e t he wei ght s
435
( 2)
FY 1956- 63,
t he sour ce f or t hi s per i od was
budget appendi x t abl es of agency obl i gat i ons by obj ect .
l ast adj ust ment s,
desc r i bed above,
( 3)
The f i r st and
wer e mai nt ai ned f or t hi s per i od.
FY 1947- 1955,
summar y dat a f or obl i gat i ons by
obj ect coul d not be l ocat ed f or t hi s per i od.
The def ens e r esi dual
in
each of t hese year s was di st r i but ed among t he 21- 31 budget cat egor i es
accor di ng t o t he di st r i but i on of
B.
Feder al
Pr ocedur es Used t o Def l at e Feder al
As ment i oned ear l i er ,
r esi dual .
Def ense Pur chases
c ur r ent dol l ar est i mat es of def ens e pur chases
wer e def l at ed at t he mos t di saggr egat ed l evel s f easi bl e,
and t he r esul t i ng
const ant dol l ar est i mat es wer e summed t o obt ai n cons t ant dol l ar t ot al s.
Thus,
even at t he mi ddl e l evel s of di saggr egat i on t he def l at or s ar e of t en
der i ved i mpl i ci t l y.
Exhi bi t VI - B- 3 gi ves t he def l at or s i n each cat egor y
of def ens e pur chases f or t he year 1972.
I n t he t ext t hat f ol l ows, t he
cur r ent met hod of der i vi ng t hese def l at or s at BEA wi l l
be descr i bed.
436
EXHI BI T VI - B- 3 - DEFLATORS FOR DEFENSE PURCHASES,
( 1958 = 100. 0)
Tot al
Compensat i on - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Mi l i t ar y - . . . . - . . . . . . - . . . . . - . . . . . . . . . . .
Ci vi l i an - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - St r uct ur es - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Ti ew c o ns t r uc t i on- - - - - - - - - - - - - - - - - - - - - - - - Mi l i t ar y f aci l i t i es - - - - - - - - - - - - - - - - - - - Mi l i t ar y h o s p i t a l s - - - - - - - - - - - - - - - - - - - I ndust r i al - - - - - - - - - - - - - - - - - - - - - - - - - - - - Resi dent i al - - - - - - - - - - - - - - - - - - - - - - - - - - - Less:
For ce account c o mp ens at i on- - - - - - —
Pl us:
Pur chases of exi s t i ng st r uct ur es —
Al l ot her pur chases - - - - - - - - - - - - - - - - - - - - - - - Mi l i t ar y equi pment - - - - - - - - - - - - - - - - - - - - - - Ammuni t i on - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Fuel . . . . . . . . - . . . . . - . . . . . . . . . . . . . . . . . . . . .
Pur chases f r om abr oad - - - - - - - - - - - - - - - - - - - - St oc kpi l i ng and def ense pr oduct i on - - - - - - Less:
Sal es of mi l i t ar y pr oper t y - - - - - - - Ot h e r - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Tr avel and t r anspor t at i on of per sons - - Tr anspor t at i on of t h i n g s . . . . . . . . . . . . . . . .
Rent , communi cat i ons, and ut i l i t i es - - - Pr i nt i ng and r e pr oduc t i on- - - - - - - - - - - - Ot her ser vi ces - - - - - - - - - - - - - - - - - - - - - - - - - Suppl i es and mat er i al s . . . . . . . . . . . - . . . . . .
Equi pment - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
1972
169. 6
229. 9
231. 2
227. 7
186. 0
187. 1
187. 1
182. 8
187. 2
155. 3
134. 4
124. 4
114. 7
135. 9
150. 6
126. 4
170. C
108. 6
126. 2
121. 8
165. 9
119. 2
107. 5
437
1.
Compensat i on
Compensat i on i s di saggr egat ed and def l at ed by ext r apol at i ng
base- y e a r
compensat i on over
a.
t i me by an i ndex of
changi ng manpowe r st r engt hs.
Mi l i t ar y Compensat i on
I n t he case of t he mi l i t ar y sect or ,
t hi s pr ocedur e was
used f or t he f ol l owi ng br eakdown:
Ar my and Ai r For ce Of f i cer s
Ar my and Ai r For ce Enl i st ed Men
Havy Of f i cer s
Navy Enl i st ed Men
Mar i ne Cor ps
Agai n,
i n t he def l at i on pr ocess,
est i mat es,
as wel l
as i n der i vat i on of cur r ent
Coast Guar d f i gur es have been expl i ci t l y r emoved.
dol l ar
Dat a on ser vi ce
st r engt h comes t o BEA f r om t he Depar t ment of Def ense.
b.
Ci vi l i an Compensat i on
The pr ocedur e descr i bed above was used t o def l at e ci vi l i an
compensat i on as a si ngl e aggr egat ed f i gur e.
Dat a on ci vi l i an empl oyment i n
def ense- r el at ed agenci es was col l ect ed f r om t he Ci vi l
2.
Ser vi ce Commi ssi on.
St r uct ut es
Det ai l ed def l at i on i s onl y done f or t he var i ous component s of
new const r uct i on.
a.
New Const r uct i on
New const r uct i on consi st s of t he f ol l owi ng i t ems:
t ar y f aci l i t i es, mi l i t ar y hospi t al s ( year s 1966- 72 onl y) ,
t i on,
and r esi dent i al
const r uct i on.
i ndust r i al
mi l i
const r uc
They ar e def l at ed i n t he f ol l owi ng way:
438
( 1)
Mi l i t ar y Faci l i t i es
Thi s f i gur e i s def l at ed by t he f ol l owi ng equal l y
wei ght ed i ndexes:
posi t e I ndex,
Co.
Amer i can Appr ai sal
t he Geor ge ¡\. Ful l er
I ndex, bur eau of Publ i c Roads Com
Co. ,
I ndex,
and t he Tur ner Const r uct i on
I ndex.
( 2)
Mi l i t ar y Hospi t al s
Kher r t hi s i t em i s det ai l ed separ at el y,
it is
def l at ed by t he same def l at or used f or mi l i t ar y f aci l i t i es.
( 3)
Resi dent i al
For t he per i od 19G4 t o dat e,
t he Census Bur eau
i ndex of new si ngl e f ami l y houses i s used t o def l at e r esi dent i al
t i on.
Fi gur es f or t he per i od 1947- 1902 wer e def l at ed by t he E. C.
pr i ce i ndex f or r esi dent i al
( 4)
const r uc
Boeckh
st r uct ur es.
I ndust r i al
Thi s i t em i s def l at ed by t he Tur ner Const r uct i on
Co.
I ndex.
Af t er each component of new const r uct i on has been def l at ed, a f ur t her adj ust
ment i s made t o r ef l ect changi ng pr of i t mar gi ns.
Thi s adj ust ment i s necessar y
because def l at i on of t he component s of new const r uct i on i s done wi t h t he
use of cost i ndexes, r ef l ect i ng changes i n t he cost s of t he f act or s of pr o
duct i on.
Changes i n t he “ pr i ce" of t he uni t of const r uct i on,
r ef l ect s changes i n pr of i t mar gi ns as wel l
however ,
as changes i n f act or cost s.
439
Year l y est i mat es cf pr of i t mar gi ns appl i c abl e t o gover nment
st r uct i on ar e put i n i ndex f er n.
l evel
t han t hey wer e i n 1953,
downwar d ( upwar d)
I f mar gi ns wer e at a hi gher ( l ower )
t he const ant dol l ar f i gur e woul d be adj ust ed
by t he same pr opor t i on.
was appl i ed t o each of
t he const ant
Thi s pr of i t mar gi n adj ust ment
dol l ar component s cf new const r uct i on.
For ce Ac count Compensat i on
b.
As di scussed ear l i er ,
t hi s i t em i s deduct ed f r om new
I n t he def l a
const r uc t i on i n t he der i vat i on of cur r ent dol l ar wei ght s.
t i on pr ocess
c on
f or ce account
i s not def l at ed expl i ci t l y,
but ,
const r uct i on l ess f or ce account i s def l at ed by t ne i mpl i c i t
new const r uct i on desc r i bed above.
i nst ead,
new
def l at or f or
Compensat i on of f or ce account empl oyees
i s def l at ed i n t he compensat i on cat egor y above.
c.
Pur chases of Exi st i ng Asset s
Thi s ser i es i s def l at ed i n t wo separ at e par t s:
used r esi dent i al
net t r ansf er s of
st r uct ur es i s def l at ed by t he Bur eau of
t he Census New One- Fami l y houses i ndex and ( 2)
r esi dent i al
CEA.
const r uct i on cost
Al l
3.
f uel ,
t he new
ot her pur chases ar e mi l i t ar y
net pur chases f r om abr oad,
sal es of mi l i t ar y equi pment
cat egor y i s der i ved as a r esi dual
i nt er est i ng;
of
Ot her Pur chases
ammuni t i on,
di scussed above.
def l at or Devel oped at
i ndexes devel oped at Census.
def ense pr oduct i on,
l ast
t r ansf er s of used non-
dol l ar wei ght i ng wi t h sever al
The cat egor i es i ncl uded under al l
equi pment ,
net
st r uct ur es i s def l at ed by an i mpl i ci t
Thi s def l at or uses cur r ent
( 1)
st oc kpi l i ng and
and ot her pur chases.
Thi s
and i s f ur t her di saggr egat ed as
Def l at i on of mi l i t ar y equi pment
i s per haps t he most
a sl i ght l y mor e det ai l ed descr i pt i on of t hi s pr ocedur e f ol l ows.
440
a.
Mi l i t ar y Equi pment
Tot al
gat ed i nt o t he sever al
def ense pur chases of mi l i t ar y equi pment i s di s aggr e
cat egor i es al r eady descr i bed.
These ar e l i st ed agai n
bel ow:
Oper at i ons and Mai nt enance
Ai r c r af t , Mi s s i l es , and Or dnance
( Less Ammuni t i on)
Shi ps
El ect r oni cs and Communi cat i ons
Tr ucks
0 t i i er
I nst r ument s
Gener al
I ndust r i al
Machi ner y-
Const r uct i on Machi ner yTr ansmi s si on and Di st r i but i on Equi pment
El ect r i cal
Met al wor ki ng Equi pment
■_ach of
Pr i ce
t hese cat egor i es i s def l at ed by a wei ght ed aver age of Whol es al e
I ndexes ( WPI )
publ i shed by t he Cur eau of Labor St at i st i cs.
wei ght s used t o combi ne t he WPI
The
i n a par t i c ul ar cat egor y var y each y ear
and ar e based on est i mat es of
t he ki nds of pur chases of equi pment
i n t he
pr i vat e sect or i n t hat year .
These est i mat es ar e made usi ng shi pment
dat a;
i ncl uded i n t oe cal cul at i on ar e domest i c shi pment s and i mpor t s of equi pment ,
and ex cl uded ar e expor t s and gover nment pur chases.
1^71 wei ght s,
due t o t he usual
I ndexes f or 1972 use
del ay i n obt ai ni ng cur r ent
f i gur es.
441
One shoul d not e t hat t hese i ndexes ar e used t o def l at e gover nment
pur chases of def ens e- r el at ed equi pment ,
even t hough t he gover nment sect or
has been ex pl i c i t l y r emoved f r om t he wei ght i ng scheme i n t he der i vat i on
of t he i ndex i t sel f .
Thi s,
of cour se,
may l ead t o si gni f i c ant
i naccur aci es.
I t poi nt s up t he need f or new def l at or s t hat use bot h wei ght s and pr i ce
dat a t hat ar e bet t er r el at ed t o pur chases i n t he publ i c or def ens e sect or s.
The sour ce of es t i mat es of shi pment s of equi pment
St at es i s t he Pr oduct Shi pment s t abl es of
Sur vey of Manuf act ur es . "
unpubl i s hed Census dat a,
i n t he Uni t ed
t he Census publ i cat i on " Annual
I mpor t s and expor t s of equi pment ar e f r om
but si mi l ar f i gur es ar e av ai l abl e i n t he Census
publ i cat i ons " For ei gn Tr ade U. S.
I mpor t s" and " U. S.
For ei gn Tr ade Expor t s. "
The est i mat es of gover nment pur chases of equi pment ar e made f r om t he
Budget ,
unpubl i s hed f i gur es f r om GSA on pur chases of vehi cl es and DOD
and AEC cont r act awar d dat a suppl i ed by t hese agenci es.
Cont r act awar d
dat a i n each cat egor y i s advanc ed 3 mont hs i n an ef f or t t o ac count f or
t he per i od i n whi c h t he equi pment
i s pr oduced.
I n t he f ol l owi ng sect i ons
t he def l at or f or each equi pment cat egor y i s di sc us sed br i ef l y and i t s
pr i nci pal
component s det ai l ed.
( 1)
Oper at i ons and Mai nt enanc e
The def l at or f or t hi s cat egor y i s a wei ght ed
aver age of t he f ol l owi ng i ndexes ( WPI codes ar e gi ven i n par ent hesi s) :
Consumer Pr i ce I ndex f or Aut o Repai r s and Mai nt enance,
Vehi cl e Par t s ( 1412) and t he WPI
f or Ot her Speci al
t he WPI
I ndust r i al
( 1166) .
Thes e ar e combi ned wi t h t he same wei ght s each y ear
and . 08,
r espect i vel y) ,
f or t he y ear 1958.
f or Mot or
Machi ner y
( . 81,
. 11,
based on BEA' s I nt er i ndust r y Economi cs St udy
442
( 2)
Ai r c r af t , Mi s si l es ,
and Or dnance ( Less Ammuni t i on)
The def l at or f or t hi s cat egor y i s made up of
r oughl y equal
Met al
t r i cal
Fabr i cat ed St r uct ur al
por t i ons of t he f ol l owi ng i ndi ces:
Pr oduct s ( 107) ,
Met al wor ki ng Machi ner y and Equi pment
Machi ner y and Equi pment
( 117) ,
and Di esel
( 113) ,
El ec
Engi nes, ot her t han
Aut omot i ve ( 119403) .
( 3)
Shi ps
Thi s def l at or i s a wei ght ed aver age of t en WPI ' s;
t he f ol l owi ng f our make up mor e t han 60 per cent
St eam and Hot Wat er Equi pment
and Equi pment
( 1141)
( 1061) , Met al
and El ect r i cal
( 4)
of t he wei ght s i n 1971:
Tanks ( 1072) ,
Pumps,
Machi ner y and Equi pment
Compr essor s
( 117) .
El ect r oni cs and Communi cat i ons
Thi s def l at or i s a wei ght ed aver age of 12 WPI ' s;
ov er 70 per c ent of
boar d Equi pment
t he 1371 wei ght s ar e made up of Swi t chgear and Swi t c h
( 1175)
and an i ndex of hour l y wage of ski l l ed cons t r uct i on
l abor , cal c ul at ed by Engi neer i ng hews Recor d and r epor t ed i n t he Sur vey of
Cur r ent Dus i nes s .
( 5)
Tr ucks
Thi s i ndex i s al most ent i r el y t he WPI
f or Mot or
Tr ucks ( 141102) .
( C)
I nst r ument s
The def l at or f or i nst r ument s i s a ' wei ght ed aver age
of seven pr i ce i ndi ces.
Thr ee make up over 70 per cent of t he 1971 wei ght s:
I nt egr at i ng and Meas ur i ng I nst r ument s ( 1172) ,
( 1222)
and Phot ogr aphi c Equi pment
( 1541) .
Met al
Commer ci al
Fur ni t ur e
¿43
( 7)
Gener al
I ndust r i al
Machi ner y
Thi s def l at or i s a wei ght ed aver age of seven
pr i ce i ndi ces.
Two make up al most 60 per cent of 1971 wei ght s:
Compr essor s and Equi pment
ment
( 1141)
ari d I ndust r i al
Mat er i al
Pumps,
Handl i ng Equi p
( 1144) .
( 8)
Const r uct i on Hachi ner y
Thi s i s a wei ght ed aver age c f 9 i ndi ces.
pal
i ndi ces i ncl ude:
and Gr ader s ( 1125)
Power Cr anes,
Excavat or and Equi pment
( 1121) ,
Pr i nc i
Scr aper s
and Spec i al i zed Const r uct i on Machi ner y ( 1122) .
( 9)
El ect r i cal ,
Equi pment
Tr ansmi ssi on,
and Di st r i but i on
Thi s def l at or i s a wei ght ed aver age cf 14 pr i ce
i ndi ces.
Fl aki ng up hal f of
t he 1971 wei ght s ar e:
( 117201) ,
Gener at or s and Gener at or Set s ( 117302)
El ect r i cal
I nst r ument s
and Tr ansf or mer s and
Power Regul at or s ( 1174) .
( 10)
Met al wor ki no f ' achi ner y
Thi s i s a wei ght ed aver age of seven i ndi ces:
Met al wor ki ng Machi ner y and Equi pment
( 113)
i s gi ven about
50 per c ent of
t he wei ght .
I n al most ever y case
quar t er l y est i mat es of t hese def l at or s ar e
aver aged t o obt ai n an annual
def l at or s on an annual
est i mat e.
Ther e ar e tv; o cases,
( 1) The annual
ar e adj ust ed t o t he annual
def l at or f or Shi ps i s obt ai ned
f r om t he Mar i t i me Commi ssi on and ( 2)
t he Ci vi l
wher e
basi s ar e obt ai ned f r om out si de Di _A, and t he quar
t er l y est i mat es ( der i ved as al r eady descr i bed)
Lenchr nar ker s:
however ,
Aer onaut i cs bear d ( CAD) .
t hat
f or Ai r c r af t
i s obt ai ned f r om
444
I n der i vi ng a def l at or f or ci vi l
ai r cr af t ,
changes bet ween successi ve year s i n t he pr i ce of
equi pment sol d i n each of
t he t wo year s.
CAD col l ect s dat a on t he
i dent i cal
maj or i nput
For each t ype of equi pment
t he
uni t pr i ce i n each y ear i s wei ght ed by t he number of uni t s sol d i n t he
mor e r ecent year .
The r at i o over al l
t ypes of t he wei ght ed pr i ce i n t he
l at er y ear t o t he pr i ce of t he same t ype i n t he ear l i er y ear i ndi cat es
t he r el at i ve change i n pr i ces;
t hen,
t hese i ndi ces ar e l i nked t o a common
base year .
Ani muni t i on
b.
Expendi t ur es f or ammuni t i on ar e def l at ed by an equal l y
wei ght ed aver age of t wo WPI ' s:
Chemi cal s and Al l i ed Pr oduct s ( OC)
and
don- f er r ous Pet al s ( 102) .
c.
Fuel
Thi s f i gur e i s def l at ed by t he UP I f or Ref i ned Pet r ol eum!
Pr oduct s ( 057) .
d.
bet Pur chases
f r om Abr oad
The t wo component s of
and mi l i t ar y sal es,
def l at or s,
t hi s i t em,
mi l i t ar y expendi t ur es
ar e each def l at ed separ at el y , usi ng i mpor t and expor t
r espect i vel y.
On t he i mpor t si de,
ci vi l i an pur chases of mer c han
di se and gover nment pur chases of mi l i t ar y and nonmi l i t ar y equi pment ar e
al l
def l at ed by t he Census Cur eau I mpor t Uni t - Val ue I ndex.
Tr avel
ser vi ces
ar e def l at ed usi ng cost of l i vi ng i ndi ces of var i ous f or ei gn count r i es,
and t he i nvest ment
I ndex.
Fi nal l y,
i ncome cat egor y i s def l at ed by t he Expor t Uni t - Val ue
t r anspor t at i on ser vi ces ar e al l ocat ed among sever al
c at e
gor i es and def l at ed wi t h i ndexes devel oped f r om dat a obt ai ned on ai r l i ne
r at es and vol umes,
por t at i on ser vi ces.
ocean f r ei ght
r at es,
and dat a on ot her ki nds of
t r ans
445
On t he ex por t si de,
t he same pr ocedur e i s f ol l owed, usi ng Ex por t Uni t -
Val ue I ndexes f or sal es of mer c handi s e and gover nment sal es;
Cons umer Pr i ce I ndex i s usee t o def l at e f or ei gn t r avel
and t he Expor t Uni t - Val ue I ndex t o def l at e I nvest ment
t he t ot al
i n t he Uni t ed St at es,
I ncome.
Agai n,
r at e and vol ume dat a ar e used t o der i ve def l at or s f or t r anspor t at i on
ser vi ces.
e.
St oc kpi l i ng and Def ense Pr oduct i on
Ex pendi t ur es f or t hi s act i vi t y ar e def l at ed by t he
Whol esal e Pr i ce I ndex f or Pr i mar y Met al s,
f.
Ref i ner y Shapes ( 1022) .
Sal es of Mi l i t ar y Pr oper t y
Thi s i s def l at ed by use of t he Whol esal e Pr i ce I ndex f or
al l
commodi t i es ot her t han f ar m and f ood pr oduct s.
g.
Ot her Pur chases
Thi s cat egor y i s br oken down i nt o sever al
chases by a met hod descr i bed ear l i er .
ki nds of pur
A descr i pt i on of t he def l at i on of
each of t hese par t s f ol l ows:
( 1)
Tr avel
Thi s i s def l at ed by a wei ght ed aver age of
t he Con
sumer Pr i ce I ndexes ( CPI )
f or Tr anspor t at i on Ser vi ces ( wei ght of
and
Ot her Ser vi ces ( wei ght of
. 4) .
( 2)
. 6)
Tr anspor t at i on of Thi ngs
Thi s i s def l at ed by an i ndex of aver age f r ei ght
r at es pr epar ed by t he I nt er st at e Commer ce Commi ssi on.
446
( 3)
Communi c at i ons
Thi s i s def l at ed by t he CPI
f or Resi dent i al
Tel ephone Ser vi ces.
( 4)
Rent and Ut i l i t i es
Thi s i s def l at ed by a wei ght ed aver age of t he CPI
f or Gas and El ect r i ci t y.
( 5)
Pr i nt i ng and Repr oduct i on
Thi s i s def l at ed by t he ! 7PI f or newspr i nt
( 6)
( O' ?! 302) .
Ot her Ser vi ces
¡ hi s i s def l at ed by a wei ght ed aver age of
CPI ’ s.
These ar e Aut o Repai r s and Mai nt enance ( wei ght of
Ser vi ces ( . 69) ,
Medi cal
Car e ( . 14)
( 3)
Equi pment
f our
. 15) , Ot her
and Readi ng and Recr eat i on ( . 92) .
Thi s i s a wei ght ed aver age of ni ne WPI .
Maki ng
up ov er hal f t he wei ght s ar e Of f i ce and Hone Machi nes and Equi pment
Phot ogr aphi c Equi pment and Suppl i es ( 154)
041) .
( 1193) ,
and Mot or Vehi cl es and Equi pment
447
APPENDI X VI I - A
INDEXES OF NAVI' CONTRACT PRICES 1/
Introduction
The Navy Indexes of contract Prices wore designed as an administrative
tool for use by procurement officers and potier-making officials. When properly
interpreted, they provide a versatile instrument in analysis of past procurenent and in the determination of close pricing on current and future procurement.
index method was developed .as a result of extensive consultation with
Navy personnel, with the Purchases Division of the Army Service forces, and with
representatives of the Bureau of Labor Statistics. Because of the complex and
discontinuous nature of the basic price data, as well as special considerations
introduced by government controls of labor and materials, and other factors pe
culiar to wartime procurement, it was necessary to introduce certain modifica
tions of .conventional statistical method. Although these techniques and the
characteristics of the basic price data limit comparison of the price indexes
with other staudard price indexes, the method chosen was that which was deemed
■co be most useful for administrative purposes. .The technical aspects are dis
cussed in detail later.
Basically, these indexes comprise a series of summarizations of price
data originating in the individual contracts and combined successively into 745
commodity indexes, 141 commodity class indexes, 38 subgroup indexes, 28 group
indexes, 6 Bureau indexes, and the composite Navy index. Each of the 746 items
included”in the index sample was selected after careful consideration of the
extent to which its price movements were representative of those of other simi
lar items in the group.
In themselves, these 746 items account for more than
60$ of the total dollar value of Navy procurement. The arrangement of the
elements is depicted graphically below.
Interpretation of the Index
An index is
subject, but does
Consequently, the
be conditioned by
an indicator; it measures and records the movements of its
not necessarily provide the answers to the questions it raises.
interpretations placed upon the movements of the index must
careful consideration of all.the factors involved.
17— Sour ce:
Di vi si on of I ndust r i al Pr i ces and Pr i ce I ndexes, Of f i ce of
“
Pr i ces and Li vi ng Condi t i ons, Bur eau of Labor St at i st i cs, 194C.
448
One of the important applications of these price indexes is to point out
significant deviations from expectancy - either an a priori expectancy or one
which is developed by comparison of the indexes for similar or closely related
items.
Thus, in a period during which it is known that all cost factors have
risen, it would be expected that price indexes for the commodities concerned
would rise correspondingly.
A downward index movement during such a period
would, therefore, be of special interest.
It might be due to any of a number
of factors,, either favorable or unfavorable - for example, to new operating
economies, to reduction in the profit margin, to excessive prices for earlier
procurement, etc.
Likewise, if a group index is comprised of several suhgroups of closely
related items, it would be expected that movements of tne subgroup indexes
should be similar in direction and magnitude.
Xf one of the subgroup indexes
moves in a different direction or mucn more markedly than the others, an ex
planation should be sought.
As before, it may be caused by any of a number of
factors, either favorable or Unfavorable, such as differences in the character
of the facilities of tne companies involved, differences in geographical loca
tion with resulting differences in labor and material costs, differences in the
effectiveness of earlier procurement, etc.
It may indicate the need for closer
pricing eitner in the divergent subgroup or in the non-divergent subgroups; or
an examination of all the factors, involved may justify completely the divergent
price movements.
It should be emphasized that a price index does not of itself measure ef
fectiveness or ineffectiveness of procurement policies.
As indicated above,
a sharply declining price may be due to factors unassociated with procurement
policy or to a correction of earlier unduly high prices.
A price increase may
be' considerably less than would have resulted with less careful procurement.
Depending on the circumstances, a horizontal price trend may represent either
excellent or poor procurement.
However, for those charged with the responsi
bility of formulating and executing procurement policy prices and price move
ments are factors of fundamental importance. The indexes perform an essential
function by providing a readily available measure of the trend of prices for
major commodity groups and for specific representative commodities.
The method used in the computation of the Navy indexes measures the change
in prices charged by individual companies for identical, or closely similar,
products; it does not necessarily measure the change in average prices charged
by all companies for such commodities.
For most of the commodities included in
the Navy indexes, inconsequential variations would result by substituting the
average price method.
The areas in which substitution of the latter method would
result in major changes in the price indexes aré limited to relatively few items
of Navy procurement (primarily Airframes and certain Electronics items) in which
hew contractors are introduced at price levels substantially higher or lower than
those of existing contractors.
In interpreting the indexes, it should he borne in mind that many of the *
important items - particularly in the Bureau of Aeronautics and the Electronics
Division of the Bureau of Ships - are new items.
Although experimental and
developmental contracts have been exclude_d, the initial production prices may
include nonseparable developmental costs, engineering and tooling costs,
449
personnel training costs, and large contingency allowances.
When later prices
do not include these non-recurring costs, the price change is partially at
tributable to these factors.
Moreover, the introduction of these new items at
the index level may result in a cumulative downward movement of the index.
Accordingly,, in analysis or comparison of long-term movements of the indexes,
special attention should be given these factors.
In the preparation of the indexes, an extensive body of price, quantity,
and other contract information has been built up on the commodities included
in the index and on a number of other related commodities.
Thid informetiou
is readily available for the use of procurement officers and other accredited,
members of the Naval establishment.
Index Sample
The large number and variety of items purchased by the Navy Department
preclude construction of an index comprising all Navy contracts.
The method
of statistical sampling permits the measurement of'movements of Navy contract
prices through judicious selection of a relatively small sample of representa
tive items for detailed study* .."The basic requirement of a truly representa
tive sample is that it must contain all important characteristics of the total
mass of data from which it is drawn,
Because of the heavy concentration of
dollar value of N a w procurement in a small portion of the total number of
items purchased, it has been possible to meet the requirement of representa
tiveness with a relatively small sample of items which, of themselves, account
for more than 60% in dollar volume of total Navy Department contracts.
For each Bureau index, representative items were selected as a sample of
procurement made under the cognizance of the Bureau.
Thus, the sample includes
not only items purchased directly by the Bureau for its own account, but also,
in some instances, items purchased by another Bureau (notably the Bureau of
Supplies and Accounts) on requisition by the cognizant Bureau.
Field pur
chases are represented in three major categories:
(l) diesel and gasoline
engine'parts purchased by NSD, Vechanicsburg- (included in the Bureau of Ships
iiidex); (2) photographic equipment and supplies purchased by ASO, Philadelphia
(included in the Bureau of Aeronautics index); and (3) clothing and textile
items (since May 1945) and cigarettes (since December 1944), purchased by NFO.
New York (included in the Bureau of Supplies and Accounts index).
Selection of the sample was based on the following criteria:
1.
Commodity group representation.
Lack of uniformity in specifications
and irregularity and infrequency of procurement in certain commodity groups
have made available only a limited number of representative items for index
purposes in those commodity groups. However, it is believed that each impor
tant* ■commodity group and subgroup has been satisfactorily represented.
*For the purpose of the index, the relative importance of commodity
groups, subgroups, and items was based on their dollar value in Bureau pro
curement.
This was supplemented by consultation with procurement officers
and an analysis of past and scheduled future production.
450
2.
Importance and, representat A e n e a s of the item. Each item included
in the index sample was selected after careful consideration of the extent tc
which its price movements were representative of those of other similar items
in the group.
In most cases, the items selected were those which were impor
tant in collar value; in some cases, items of relatively small dollar value
were included
tc represen; segments of the group whose movements differed from
that of the large-value items, or to. represent groups in which the large-value
items were procured infrequently or were subject to frequent specification
changes.
3.
Homogeneity. Items for index purposes m u s t , of necessity, possess a
high degree of homogeneity over the time period covered.
Many items purchased
by the Navy are subject to continued changes in specifications, thus necessi
tating .certain adjustments to obtain a comparison of :successive'prices.
Where
dollar adjustment for specification changes was possible, this adjustment was
made.
In other cases, where several observations were available for each
specification, the index was constructed by linking together the sets cf o d servations, as described below (in Index Technique). In still, other cases (pri
marily in Electronics and Airframes), where adjustment could not be made, and
inclusion of the items was essential to representation of important groups,
the criterion adopted was that of functional, rather than strict technical,
homogeneity.
-4. Frequency of contracting.
A necessary criterion for selection was
the frequency of contracting for the items within the time period covered.
Where two similar items were equally representative, that item which showed
the greatest number of price observations was chosen.
In some cases, items of
smaller value were chosen for representation because only ione or two contracts
were
for the large-value items in the group.
Price Observations TTse'd
For each commodity selected, an index was calculated from the following
price observations for each company for which two or more price observations
were available during the index period,
(See Index Technique).
1.
All new contracts and supplementary contracts.
2. All increases in quantity of an existing contract, whether by sup
plementary contract, letter, or any other instrument (except small increases
clearly labelled as overruns).
3. All alterations in contract price (except adjustments exactly com
pensating for changes in specifications, delivery point, packing, g.f.e., etc.).
However, where two or more contracts let .to the same*company at different
.-.imes are running concurrently, only the price alterations to the latest con
tract are used in the index.
As a logical correlary, where two or more con
tracts are let to the came company in a single month, the latest contract is
used as the price observation, in that month.
4.
In cost-plus-a-fixed-iee contracts, return costs (plus the fixed fee)
In those cases in which return costa were not
wer e used wherever available.
451
available, estimated cost plus tne fixed fee was used.
(Cost-plus-a-fixed-fee
contracts were encountered in procurement of airframes (Bureau,of Aeronautics
Index) and of certain complete vessels (Bureau of Ships index)).
Index Technique
1. The index is basically a weighted aggregative type* with certain modi
fications which have been introduced to handle special problems o f .homogeneity
and continuity of the data.
These modifications are as follows:
(a) Monthly link relatives. Because of the complex and discontinuous
nature of the basic price'data (e.g., frequent changes in specifications, cost
and operational differences between companies manufacturing the same item,
varying amounts of dovernment-furnished equipment, material, and services,
variation between f.o.b. and delivered prices, etc.), the index for an item is
first calculated on a monthly link basis.
(That is, the item link relative
for each month shows the price change from the preceding month for those com
panies represented in both months.) These monthly link relatives are multi
plied together to form the chain index based on the- month of October 1942.
This method averages the changes in the prices charged by individual companies
instead of measuring the change in average^ price of all companies.
(b) Carryover.
Contract prices obviously are not available from each
company for each commodity for each month; in many cases, wide intervals of
time elapse between successive price observations.
In order to obtain a de
gree of continuity in the index, each price observation is assumed to remain
fixed until the final delivery date indicated in the contract, provided no new
price observation is available for the company during this period.
If a new
price observation for the company occurs before the final delivery date, the
former price is dropped, in accordance with the assumption that the most re
cent price observation represents the current contract pj'ice.
In the absence
of new price observations, a company is dropped from the calculation in the
month following the final delivery date indicated on the contract.
If a new
price observation ip available in a later month, an adjustment -is made to al
low for the movement of the item index in the intervening period.
2. Base Period.
The usual base period criteria for- index numbers are
normalcy and recency.
In the Navy index, the recency requirement is automati
cally satisfied since procurement on a full wartime scale was not reached
until well into 1942. The normalcy criterion must be altered so that it has
meaning with respect to a wartime economy.
Specifically, this period shoulu
be one in which major wartime requirements are fairly well recognized and
incorporated into procurement and production; in which wartime industry has
had some time to adjust itself to technological problems; in which both pro
curement officers and contractors have had time to adjust their initial cost
*The basic method of calculation may be expressed algebraically as follows:
Item Link Index
2_ Pnwc
¿_jPn-lwc
Where pn represents the price in the given month, pn _]. represents the price
in the immediately preceding month, and w„ represents the company weight
452
estimates in.t he l i ght of act ual cost s; and i n whi ch most of t he necessar y
conver si on from peacet i me t o war t i me pr oduct i on has been accompl i shed.
These
condi t i ons were not sat i sf i ed unt i l t he l at t er par t of 194*2; accor di ngl y, t he
mont h. of Oct ober , 1342, has been sel ect ed as t he base per i od.
I n or der t o
show t he movement of pr i ces si nce America's entry i nt o t he war , al l i ndexes
( wher e pr i ce obser vat i ons ar e avai l abl e) have been car r i ed back t o Januar y
1942.
3.
Wei ght s.
The cr i t er i a of " r ecency" and " nor mal cy" ar e even mor e
i mpor t ant i n t he sel ect i on of wei ght s f or an i ndex.
Gover nment al - pur chasi ng
met hods necessi t at e t he use of a f ul l year as an absol ut e mi ni mum f or wei ght i ng
pur poses; and r api dl y changi ng, war t i me r equi r ement s necessi t at e a r ecent and
f l exi bl e wei ght i ng basi s.
The dol l ar val ue of cont r act s awar ded dur i ng t he cal endar year 1943 was
used as t he wei ght i ng base f or t he i ndexes f r om 1942 t o 1944.
Wei ght s f or
1945 wer e based on t he dol l ar val ue of est i mat ed 1945 r equi r ement s, when
avai l abl e.
Wher e such 1945 i nf or mat i on was not avai l abl e, 1945 wei ght s wer e
based on t he 1944 dol l ar val ue of cont r act s awar ded.
453
NaVY DEPaKTMENT
Composite Index
Year & Mo.
Navy Index _________________ Component Bureau Indexes----------- --------Bureau of
Bureau of
Bureau of Bureau of
Sh i p s
Bureau of Bureau, of
Aeronautics Ordnance
1242
Jan.
Feb.
Mar.
Apr..
May
June
July
AUg.
Sept.
Oct.
Nov.
Dec.
( 7 1 1 Se r i e s)
( 1 6 8 'Se r i e s)
106.0
113.6
106.2
114.4
106.1
113.5
109.5
109.0
104.5
104.2
(1 2 2
Se r i e :
102.3
102.6
Sh ip b u ild in g
D i v i sio n
(1 5 8
Se r i e s)
103.9
102.5
1 0 3 -9
104.2
100.4
104.0
100.4
100.6
100.6
100.2
103.7
100.7
100.0
101.3
101.1
100.7
Sh i p s
Ele c t r o n ic s
D i v i sio n
(1 1 5
98.4
99.0
108.6
103.4
101.8
101.6
9 9 -7
108.6
100.5
101.1
100.7
105.6
104.7
100.2
98.8
100.4
100.2
98.4
98.2
99.8
99.6
98.0
97.8
97.9
97.7
97.6
96.2
95.8
94.8
96.4
96.3
94.0
91.4
89.3
83.0
94.1
93.5
93.0
87.7
86.2
92.2
83.1
82.4
91.5
90.4
82.3
89.3
86.4
85.8
79.6
78.0
37.6
86.8
84.7
75.3
85.4.
84.8
77.9
77.0
86.3
86.2
89.5
89.4
8 5 -3
8 5 -1
89.4
89.3
89.2
89.1
89.0
73.8
84.1
83.3
83.0
98.0
Se r i e s)
108.6
100.7
100.0
98.5
Su r g e r y
Se r i e s ) ( 3 7
98.3
98.3
100.5
100.0
98.2
Accou n ts
M e d icin e
and
104.4
104.2
104.2
103.8
103.7
102.2
100.0
and
Se r i e s) ( 1 1 1
106.7
110.1
105.7
102.8
Su p p l i e s
101.5
100.8
lo O . O
108.6
108.6
102.3
101.6
9 9 -9
100.0
100.0
96.3
94.7
100.0
99.6
9 9 -9
99.2
92.5
92.7
100.6
98.3
98.0
1943
Jan.
Feb.
Mar.
Apr.
Day
June
July
98.1
AUg.
92.1
Sept.
Oct.
Nov.
Dec.
89.5
89.0
97.9
99.4
99.9.
97.5
96.9
96.7
99.4
98.9
95.6
9 3 -2
88.5
87.7
93.1
92.7
97.1
91.1
89.7
89.6
96.5
9 5 -7
9 5 -0
100.3
100.8
103.5
103.7
103.6
92.4
82.5
81.6
103.6
91.7
1 0 3 -8
81.2
89.5
88.8
80.3
104.0
103.6
89.8
79.8
103.6
88.1
89.8
79.7
78.6
103.7
103.6
88.0
78.4
77.6
103.7
85.7
103.7
103.6
85.3
84.2
91.5
91.4
90.0
87.e
100.5
100.8
92.4
91.6
88.1
1944
Jan.
Feb.
Mur.
Apr.
May
June
July
Aug.
S©pt*
84.5
84.1
8 3 -6
77.0
-
76.8
76.0
’
75.2
Oct.
82.9
82.2
Nov.
Dec.
81.5
81.1
73.0
75.6
73.9
72.2
69.7
82.4
89.0
88.1
68.5
67.7
73.1
81.5
87.4
80.4
80.2
71.5
70.8
80.9
79.9
79.9
79.8
78.6
71.0
71.2
88.0
85.8
103.8
104.1
' 104.2
104.1
.
84.8
84.8
8 4 -7
84.4
66.7
104.1
104.2
87.4
88.0
65.4
64.8
104.1
104.2
85.7
85.8
79.3
87.8
63.9
104.0
87.6
6 3 «6
104.0
8 4 -5
85.3
68.0
68.0
78.9
78.7
77.6
86*4
63.3
62.8
104.2
67.5
67.3
77.4
86.4
86.4
77.3
86.4
84.3
1945
war*.
Feb.
Mar.
Apr. ■
May
June
July
Aug.
Sept.
Oct.
78.4
78.2
78.1
•
Nov.
De c.
*
Oct obe r
1942 = 100
62.6
104.3
104.4
8 5 -5
8 5 -9
85*9
62.4
104.3
85.9
454
I N DEX
BU REAU
IN D E X
CLASSIFICATION CHART
SUBGROUPS
GRO U PS
NO, OF
CLASSES
SERIES
(
( S3 )
AVIATION, 91 OCTANE ( 7)
87 OCTANE (10)
r
F U E L O IL
(3 1 )
P ET RO L EU M
P RO D U CT S (51)
{
NAVY,
N. a MOO ( 4 5 )
N. S. 9 2 5 0 ( 50)
(
(5 )
GRAOE H (18)
~
K E R O SE N E
D IESEL (37)
NAVY SPECIA L ( 45)
» tv »
L U BRIC A T IN G O IL S
a G R E A SE S ( I! )
OCTANE (83)
»mm
80
n *
G A SO L I N E
toco n
N. S. 2190 (5)
C L O T H IN G
(6 8 )
K ERO SEN E (100)
CL O T H IN G a
F O O T W EAR ( 9 )
T E X T IL E
B A SI C
SU P P L I E S
j
s
M ET A LS (3 6 )
M ET A L W O RK IN G
M A C H I N E R Y (1 0 )
IN D U ST R IA L
M A C H IN E R Y (1 5 )
E N D P R O D U C T S,
M ET A L (3 9 )
{
M ISCEL L A N EO U S
EN D PRODUCTS
C H E M IC A L S 8
P R O D U C T S (1 2 )
PAPER a LU M BER
PRO D U CT S (2 7 )
O T H ER E N D
P R O D U C T S (1 4 )
FOODS a T OBACCO
L. PRO D U CT S (4 )
CUTTING T OOLS (100)
PORTABLE T OOLS (O)
{
H OIST S (3)
HAND T OOLS ( 29)
OT HER END PRODUCTS, M ET A L (71)
CABL E, EL ECT RIC ( 82)
FU SES, EL ECT RIC (18)
E Q U I P M E N T (18)
j
(14p
N O N - FERRO U S ( 25)
f T RUCKS, L IFT ( 97)
\
{
O T H ER
FERRO U S ( 75)
{
<M»
E L E C T R IC A L
E Q U IP M E N T ( 2 9 )
BL AN KET S (100)
F O O D S (6 9 )
T O BA CC O P R O D U C T S (3 1 )
I SA FET Y EQUIPMENT (69)
IN ST RU M EN T S ( 4)
¡ LIGH T ING EQU IPM EN T (27)
IN
P A R E N T H E SE S
R E P R E SE N T
5
|
3
f PIG M EN T S ( 70)
1 SO AP ( 3 0 )
4
|
J PAPER PRODU CT S ( 5 8 )
| L U MBER PRODU CT S ( 42)
I
|
{ OT HER EN D PRODUCT S ( 100)
7
N O N - PERI SH A BL E
{ CIG A RET T ES (100)
(N U M BERS
»*
ACCO U N T S
P R O D U C T S(16)
- m
AN D
M ET ALS a M ET AL
PRODU CT S (13)
{
(8 4 )
com « -
OF
PROTECT IVE CLOTHING (29)
SHOES,
L EAT H ER ((100)
WORK CLOTHING
66)
OTHER CLOTHING 8
WOOL
(
47)
A CCESSO RIES ( 5)
COTTON ( 53)
{
meg -
BU REAU
T E X T IL E S
T EXT ILES a T EXT ILE
PRO DU CT S ( 9 )
(3 2 )
_
F O O T W EAR
PERCEN T AG E
W E I G H T S)
FOODS (100)
II
I
455
APPENDI X VI I
- B
FEDERAL SUPPLY CLASSI FI CATI ON CODEl /
CODE B&J - GROUND SUPPORT EQUI PMENT
FSC
CLASS
1080
Camof l age & Decept i on Equi pment
1905, 1940, 2010
Shi ps,
2020- 2090
Mar i ne Har dwar e & Deck Equi pment
2240
Locomot i ve & Mai l
2410- 20
Tr ac t or Par t s
2820- 2835
Tur bi nes & Component s
295G
Tur bo Char ger s
3010- 3040
Mechani cal Power Tr ansmi s si on
Equi pment
3210- 3230
Woodwor k i ng Machi nes
3610
Pr i nt i ng Machi ner y Par t s
3635
Cr yst al and Gl ass I ndust r i es
Machi ner y
3655
Gas Gener at i ng Equi pment
3695
Speci al
3720- 70
Far m Equi pment
3805- 15
Power Cr anes, Shovel s,
Movi ng Equi pment
T7
Par t s & Pr opul si on
I ndust r i al
Car Ac cessor i es
Machi ner y
& Ear t h
Sour ce:
" Mi l i t ar y Pr i ce I ndexes, FY 1973, Ar my Budget , "
John E. Lynch and J. St ephen Tur et t , Of f i ce of t he
As si s t a nt Di r ect or of Ar my Budget f or Resour ces, Oct . 1971.
CODE D&J -
GROUND SUPPORT EQUI PMENT
FSC
CLASS
7690
Mi sc.
8010- 30
Pai nt s, Var ni shes & Rel at ed
Mat er i al s
8120
Commer ci al & I ndust r i al
Cyl i nder s
8710
For age & Feed
8720
Fer t i l i zer s
8730
Seeds & Nur ser y St ock
4220
Mar i ne Li f e Savi ng
4310- 30
Compr essor s,
4410- 40
I ndust r i al Boi l er s,
Condenser s
4460
Ai r Pur i f i cat i on Equi pment
4510
Pl umbi ng Fi xt ur es & Accessor i es
4520
Heat i ng Equi pment , Wat er Heat er s,
Fuel Bur ni ng Uni t s
4540
Mi sc. Pl umbi ng, Heat i ng &
Sani t at i on Equi pment
4610- 30
Wat er Pur i f i cat i on, Di st i l l at i on,
Sewage Tr eat ment Equi pment
4710- 30
Pi pe & Tube Fi t t i ngs,
4810- 20
Val ves,
4930
Lubr i cat i on & Fuel
Equi pment
5410
Pr ef abr i cat ed & Por t abl e Bui l di ngs
5420
Br i dges,
5430
St or age Tanks
5440- 45- 50
Scaf f ol di ng, For ms Pr ef abr i cat ed
Tower s & Mi sc.
Pr i nt ed Mat t er
Gas
Pumps, Cent r i f ugal s
Fur naces,
hoses
Power ed & Unpower ed
Di spensi ng
Fi xed or Fl oat i ng
457
CODE B&J - GROUND SUPPORT EQUI PMENT
CLASS
FSC
5510- 30
Lumber
5610- 50
Mi ner al
3820
Mi ni ng Machi ner y
3830
Tr uc k & Tr ai l er At t achment s
3835
Pet r ol eum Pr oduct i on Equi pment
3895
Mi scel l aneous Const r uc t i on
3910
Conveyer s
3940- 50
,
Cons t r uct i on Mat er i al s
Wi nches,
Der r i cks,
Bl oc ks . Tac kl e
4010
Chai n & Wi r e Rope
4120- 30
Ai r Condi t i oni ng & Ref r i g.
4210
Fi r e Fi ght i ng Equi pment
6120
Tr ansf or mer s:
Di s t r i but i on and
Power St at i on
6150
Mi scel l aneous El ec.
Equi pment
6210- 6U
Li ght i ng Fi xt ur es
6320
Shi pboar d Al ar m & Si gnal
6350
Mi se.
6605
Navi gat i onal
6635- 36
Physi cal Pr oper t i es Test i ng
Equi pment & Rel at ed Equi pment
6655
Geophysi cal & Ast r onomi cal
I nst r ument s
6670
Scal es & Bal ances
Al ar m & Si gnal
Power & Di st .
Syst ems
Devi ces
I nst r ument s
CODE B&J - GROUND SUPPORT EQUI PMENT
FSC
CLASS
6680
Li qui d & Gas Fl ow, Li qui d Level &
Mech. Mot i on Measur es I nst r ument s
6685
Pr essur e, Temp. & Humi di t y
Measur i ng I nst .
6830
Gases:
6910
Tr ai ni ng Ai ds
7610
Books & Pamphl et s
5660
Fenci ng,
5670
Ar chi t ect ur al
Pr oduct s
5680
Mi sc.
6105
Mot or s,
6110
El ect r i cal
6115
Gener at or s & Gener at or Set s,
El ect r i cal
6116
Fuel Cel l
Access
9440
Mi sc. Cr ude Agr i cul t ur al
Pr oduct s
9504- 20
Wi r e, Bar s,
& St eel s
9525
Wi r e, Non- el ect r i cal ,
Met al Base
9535- 40
Pl at e, Sheet , St r i p, Foi l St r uct ur al
Shapes Non- f er r ous Met al
9620
Mi ner al s,
9640
I r on & St eel Pr i mar y & Semi
f i ni shed Pr oduct s
9650
Non- f er r ous Base Met al
For ms
Compr essed & Li qui f i ed
Fences & Gat es
& Rel at ed Met al
Const r uct i on Mat er i al s
El ect r i cal
Cont r ol
Equi pment
Power Uni t s,
Rods,
Nat ur al
Comp &
& For est r y
Pl at e, St r i p,
I r on
Non- f er r ous
& Synt het i c
Ref i ner y & I nt .
459
CODE D&K - TACTI CAL SUPPORT VEHI CLES
FSC
CLASS
2510- 9C
Mot or Vehi cl e Component s
2805
Gasol i ne Reci pr oc at i ng Engi nes
( Except Ai r cr af t )
2815
Di esel
2910
Engi ne Fuel Sy st em Component s
( Non- Ai r cr af t )
2920
Engi ne El ect r i cal
( Hon- Ai r cr af t )
2930
Engi ne Cool i ng Sy st em Component s
( Non- Ai r cr af t )
2940
Engi ne Ai r & Oi l Fi l t er s, Cl eaner s
( Non- Ai r cr af t )
Mi scel l aneous Engi ne Accessor i es
( Non- Ai r cr af t )
2990
Engi nes & Component s
Sy s t em Component s
2610
Ti r es & Tubes ( Except Ai r cr af t )
2630- 40
Ti r es, Sol i d & Ti r e Rebui l di ng
Mat er i al s
46 0
CODE E&T - GENERAL & I NDUSTRI AL SUPPLI ES
FSC
CLASS
3 110
Bear i ngs, Ant i - Fr i ct i on,
Mount ed
3 5 10
Laundr y & Dr y Cl eani ng Equi pment
3540
Wr appi ng & Pack agi ng Equi pment
3 9 2 0 ,3 0
&
90
Mat er i al s,
Pl ai n &
Handl i ng Equi pment
4 110
Ref r i ger at i on Equi pment
4 14 0
Fans,
5 110 - 2 0
Hand Tool s - Non- Power ed
5 2 10
Meas ur i ng Tool s
5 3 0 5 -5 3 3 5
Bol t s,
5340
Mi sc el l aneous Har dwar e,
5 3 4 5 -5 0
Abr asi ve Mat er i al s
6 8 10 - 5 0
Chemi cal s & Chemi cal
710 5
Hous e- Hol d Fur ni t ur e
7110 - 3 0
Commer ci al
72 4 0 -9 0
Mi sc.
73 10 - 3 0
Ki t chen Equi pment ,
74 10 - 5 0
Of f i ce Equi pment , Punched Car d Syst ems,
Typewr i t er s, Et c.
Ai r Ci r c ul at or s , & Bl ower s
Nut s,
Scr ews,
Ri vet s
Knobs,
Et c.
Pr oduct s
Fur ni t ur e
Ut i l i t y Cont ai ner s & Appl i ances
Tool s & Appl i ances
46 1
CODE E&T - GENERAL & I NDUSTRI AL SUPPLI ES
FSC
CLASS
7510- 30
Of f i ce Suppl i es, Devi ces,
& Recor d For ms
7910
Va c uum Cl eaner s
7920
Br ooms,
8105
Bags and Sacks
8110
Dr ums and Cans
8115
Boxes,
8125
Bot t l es and Jar s
8135
Packagi ng and Packi ng Bul k Mat er i al s
9150
Oi l s and Gr eases: Cut t i ng,
Lubr i c at i ng & Hy dr aul i c
9320
Rubber Fabr i cat ed Mat er i al s
9330
Pl ast i c Fabr i cat ed Mat er i al s
9340
Gl ass Fabr i cat ed Mat er i al s
9350
Ref r act or i es & Fi r e Sur f aci ng Mat er i al s
Br ushes,
St at i oner y
Et c.
Car t ons and Cr at es
CODE F - CLOTHI NG & TEXTI LES
FSC
CLASS
8305
Text i l e Fabr i cs
8315
Not i ons and Appar el
8340
Tent s & Tar paul i nes
8345
Fl ags and Pennant s
8415
Cl ot hi ng,
Speci al
8430
Foot wear ,
Men' s
Fi ndi ngs
Pur pose
463
CODE G&Q
CLASS
FSC
Tel ephone & Tel egr aph Equi pment
5805
5810- 95
’ « „i
Communi cat i ons,
Radar ,
Navi gat i on
5905
Resi st or s
5910
Capaci t or s
5915
Fi l t er s & Net Wor ks
5920
Fuses & Li ght Ar r est er s
5925
Ci r c ui t Br eaker s
5930
Swi t ches
5935
El ect r i cal
5940
Lugs,
5945
Rel ays,
5950
Coi l s and Tr ansf or mer s
5955
Pi e 20 El ec t r i c Cr yst al s
5960
El ect r on Tubes
5961
Semi - Conduct or s
5962
Mi c r oel ect r i c Ci r cui t
5965
Headset s, Handset s,
Speaker s
Connect or s
Ter mi nal s & Ter mi nal
Cont r act or s,
St r i ps
and Sol enoi ds
Devi ces
Mi cr ophones &
46 4
FSC
CLASS
5970
El ect r i cal
I nsul at or s
5975
El ect r i cal
Har dwar e & Suppl i es
5977
El ect r i cal
Cont ac t Br ushes
5985
Ant ennas, Wavegui des,
Equi pment
5990
Synchr os and Resol ver s
5995- 99
Mi scel l aneous El ect r i cal
6125- 30
El ect r i cal
6135- 40
Bat t er i es
6145
Wi r e & Cabl e,
6615
Aut omat i c Pi l ot Machani sms
6625
El ect r i cal Meas ur i ng & Test i ng
I nst r ument s
6660
Met er ol ogi cal
6695
Combi nat i on & Mi sc el l aneous I nst ur ment s
6710- 40,
70 80
& Rel at ed
Component s
Rot at i ng Conver t or s
El ect r i cal
I nst r ument s
Phot ogr aphi c Equi pment
6750- 70
Phot ogr aphi c Suppl i es
7410- & 40
ADP Equi pment
7450
Of f i ce Sound Recor di ng Machi nes
8130
Reel s & Spool s
465
CODE H - AI RCRAFT MATERI AL
CLASS
FSC
15 10
Ai r c r af t Fi xed Wi ng
15 2 0
Ai r c r af t Rot ar y Wi ng
15 6 0
Ai r c r af t St r uct ur al
16 10
Ai r c r af t Pr opel l er s
Hel i c opt er Rot or Bl ades, Dr i ve
Mechani sms & Component s
16 15
16 2 0 -
80
1720 -.«an
mo
26 20
Component s
Ai r c r af t Landi ng Gear Comp. , Wheel &
Br ake Syst ems, Hy dr aul i c Vacuum,
De- i ci ng Component s, Ai r - condi t i oni ng,
Heat i ng & Pr essur i zi ng Equi pment ,
Recover y Syst ems, & Mi sc. Ac cess or i es
& Comp.
Ai r c r af t Launchi ng & Gr ound Ser vi ce
Gr oup
Ai r c r af t Spec i al i zed Tr ucks & Tr ai l er s
Ti r es & Tubes,
Pneumat i c,
Ai r c r af t
2 8 10
Gasol i ne Reci pr oc at i ng Engi nees,
Ai r c r af t & Comp.
2840
Gas Tur bi nes & Jet Engi nes,
Component s
2 9 15
2925
Engi ne Fuel
Ai r c r af t
Sy st em Component s,
Engi ne El ect r i cal
Ai r cr af t s
&
Ai r c r af t
Sy s t em Component s,
FS C
C LA S S
2995
Mi scel l aneous Engi ne Accessor i es,
Ai r cr af t
4920
Ai r c r af t Mai nt enanc e & Repai r Shop
Spec i al i zed Equi pment
6 340
Ai r c r af t Al ar m & Si gnal
6 6 10
Fl i ght
6620
Engi ne I nst r ument s
6930
Oper at i onal
Syst ems
I nst r ument s
Tr ai ni ng Devi ces
467
CODE L ■- MI SSI LE MATERI EL
FSC
CLASS
1336
Mi ssi l e War heads & Component s
1338
Mi ssi l e Pr opul si on Uni t s,
Fuel & Component s
1420- 5
Mi ssi l es & Component s
1430
Mi ssi l e Cont r ol
1450
Mi ssi l e Handl i ng & Ser vi ci ng Equi pment
4935
Mi ssi l e Mai nt enanc e Equi pment
Sol i d
& Launch Equi pment
468
CODE M - TANKS,
FSC
SMALL ARMS & ARTI LLERY WEAPONS
CLASS
1005- 35
Guns
1045
Launcher s
1090
Weapon Assembl i es
1095
Ot he r Weapons
1220- 60
Fi r e Cont r ol Equi pment
Component s
1265
Fi r e Cont r ol
1270
1285
1290
4931
49 3 3
6645
&
Radi o Equi pment
Ai r c r a f t Gunner y Fi r e Cnnt r ol
Component s
Fi r e Cont r ol
Mi se.
Rada r Equi pment
Fi r e Cont r ol
Fi r e Cont r ol
Equi pment
Equi pment
Mai nt enance
We apons Mai nt e na nc e & Shop
Equi pment
Ti me Me as ur i ng Equi pment
46 9
CODE N - Ammo,
Mi ssi l es and Chemi c al s*
CLASS
FSC
1040
Chemi cal
Weapons & Equi pment
1305- 98
Ammuni t i on, Pyr ot echni cs &
Demol i t i on Mat er i al s
4925
Ammuni t i on Mai nt enanc e & Shop
Equi pment
\\$i<#■ >'p‘‘ h
5220
I nspect i on Gages & Pr ec i s i on
Layout Tool s
6665
Haz ar d- Det ec t i ng I nst r ument s
v \ Ùk
¡tV fiW & zstú
8140
'í'V Í J j S Í
t f i i ÿ' s-i f t ryçs: !
Ü ÍM ií;
i ¿í i
im 't M ,
■
l
■
" íi
Hi
* Excl udes Nuc l ear Rel at ed Devi ces
Ar mi uni t i on Boxes
4 70
APPENDI X VI I
Exampl es of
I ncl udes al l
- C
Commodi t y Speci f i cat i ons Pr i c ed— Ar my Labor at or i es—^
ORDNANCE AND ACCESSORI ES
19 pl us Combat Vehi cl es,
iterns in SIC Croup
FSC
Code
Spec i f i c at i on
Code 37174,
Uni t
95
Pl at e, Ar mor , Homo, r ol l ed, mi l spec, ,
M11- A- 13SI 2.
6" x 72" x 72" f . o. b.
des t i nat i on
Pound
95
Al umi num Ar mor per Mi l - A- 46027.
Del i v er ed
Pound
13
Bl ock, Demol i t i on, M5A1, FSN 1375028- 5148.
2520 bl ocks t o 5016
bl oc ks ,
f . o. b. des t i nat i on
2% l b.
bl oc k
13
Power l et s, CO2 gas, 12, 5 gr am,
di s pos abl e cylinders f or power ed
pei guns, 5/ pkg. - 12 pkg. / CTn.
Cr ost nan Model 231/ 5.
Del i v er ed
Car t on
13
For gi ngs f or
Company
96
Cannon, 105 MM Howi t zer , Model #XM103,
Dr awi ng nos. . For gi ng: D8 767226,
Fi ni s h Machi ned: F8767925, Mat er i al :
Al l oy St eel , Mi l - S- 10458.
f . o. b. Par npa, Texas
155 MM Shel l s J. W. Rex
Pound
Eac h
Sour ce!
" Exper i ment al I nput Pr i ce I ndexes f or Resear ch
and Devel opment , Fi scal Year s l Df l - 05" NSF 70- 7, November
I 960.
4 71
SCI ENTI FI C I NSTRUMENTS
I ncl udes al l i t ems i n SI C Gr oup 38 ex cept Code 38111,
Aircraft - I nst r u m e n t s ; and 3861, Fhot ogr aphi c Equi pment .
F SC
Code
Uni t
Spec i f i c at i on
66
Magni f i er , i l l umi nat ed, 5" di a. l ens, v i se
gr i p mount i ng, 3 l amp i l l umi nat i ng.
6650.
f . o. b. dest i nat i on
Each
66
Pi pet t e, ser ol ogi cal , 5 ml , gr aduat ed i n
l / 10t h. , Cor ni ng #7080 18/ pkg.
FSN: 6640437- 4000
Each
66
Fl ask, er l enmeyer , nar r ow mout h,
F. S. N. 6640- 000- 0642
Each
66
Ther momet er , sel f i ndi cat i ng, bi met al l i c,
Wes t on Di al , cent i - gr ade, st ai nl ess st eel
r ange 0 t o 250 deg. C. , AS Lapi ne #398- 01,
Pr ei s er 14- 5550.
FSN 6685- K22- 0791.
f . o. b. des t i nat i on
65
500 ml .
Syr i nge, di sposabl e, 20 ga. x 1%" needl e,
cc, AHS #41792.
Del i ver ed
10
Each
Each
Fur nace, ( Mar shal l ) t ubul ar , Model 1230- A,
2 V I D x 10" 0D l engt h 11" , 1200 deg.
C max. t emper at ur e,
f . o. b. dest i nat i on
Each
66
Fume Hood, wal k - i
wi dt h on dept h
openi ng 69" Met
#H- 164 wi t hout
Each
66
Mi c r os c ope basi c ( 4 x 2% x 2" ) Coke Mc Ar t hur .
FSN: 6650- M13- 0225. f . o. b.
f ac t or y
Each
66
Ul t r a Cent r i f uge, Spi nco Model E, f or
anal yt i c al and pr epar at i v e wor k.
FSN: 6640- M03- 0382. f . o. b. f act or y
Eac h
n st yl e, l engt h 70 i n. ,
32 3/ 8" , hei ght 96" ,
al ab Equi p. Company
bl ower
472
CHEMI CALS A N D ALLI E D PRODUCTS
I ncl udes al l i t ems i n SIC Gr oups 23, 29, 30 and 3?,
ex cept t i r es and t ubes, Code 2011.
FSC
Code
Spec i f i c at i on
Uni t
99
Sodi um Chl or i de, ACS, Anal y z ed Reagent
Gr ade.
FSN: 6810- SSS- O002.
f . o. b.
dest i nat i on
25 l b.
Fi sher
#S- 271
54
Tank, f abr i c, col l apsi bl e, nyl on: Wat er ,
3000 gal . n ' 3 " di a. x 54» deep, f . o. b.
des t i nat i on
Eac h
65
St r ept omy c i n Sul phat e, l gm. vi al , Squi bb
#8373.
FSN: 6505- 292- 9706.
Del i v er ed
Vi al
68
Sodi um Phos phat e Gl ass, 677. mi n. P205,
pl at el et f or m, t o be del i v er ed i n
unbr oken, seal ed paper bags c ont ai ni ng
100 l bs.
Cer t i f i c at e t o ac c ompany
shi pment st at i ng mat er i al i s of f ood
gr ade and sui t abl e f or use i n pot abl e
wat er , us ed f or c or r os i on cont r ol i n
pot abl e wat er syst em, cal gon or equal .
101- 172 bags , f . o. b. des t i nat i on
Bag
68
Ni t r ogen, Ref i l l cyl i nder , 224 cu,
f . o. b.
Loui sv i l l e, Kent uc ky
Cyl .
68
Hef r i ger ant ,
Del i ver ed.
68
Phos phor us pent ac hl or i de r eagent .
l b. l ot .
f . o. b. dest i nat i on
91
Li qui d Oxygen, t ype I I , Fed.
#BB- - 0— 925A.
Del i v er ed
68
Sul phur i c Aci d, A. C. S. Gr ade.
FSN:
6810- 19- 00102.
30- 60 bot t l es,
f . o. b.
des t i nat i on
65
Ser um Gui nea Pi g, act i ve, Lyophi l i zed, 7
ML.
FSN: 6505- 299- 8184.
1 ampul e t o
4200 ampul es,
f . o. b. des t i nat i on
7CC
Ampul e
68
Hy dr oc hl or i c aci d, Reagent Gr ade.
1 c ase
of 6- 5 pi nt bot t l es,
f . o. b. : New Yor k
Case
ft.
di c hl or odi f l uor omet hane.
2000 l b. cont ai ner
2. 5
spec.
Pound
Pound
Cu.
ft.
Bot t l e
ELECTRONI C TEST EQUI PMENT
I ncl udes al l i t ems i n SI C Code 3611 pl us
t el emet er i ng equi pment , Code 3662631.
FSC
Code
Spec i f i c at i on
Unit
66
Os ci l l os cope, t ype T533 CR t ube ac c el er at i ng
pot ent i al 10KV.
Out put ampl i f i er : 105- 125
v ol t s, 50- 50 cycl es, 500 wat t s.
Tekt r oni x
t ype 533, Mod. 08 ( P- 11 phosphor f or CRT) ,
f . o. b. des t i nat i on
Each
66
Os ci l l oscope, Tek t r oni x t ype 545A.
Beaver t on, Or egon
Each
f . o. b.
Spect r ophot omet er , r ecor di ng, DBL BM, I R,
OPT nul l f or TBL MTG, 105- 125 V 60CPS
oper . , 500 W max. , Per k i n- El mer Model
#221.
f . o. b. dest i nat i on
Each
66
Bol omet er P/ 0 AN/ FPS- 16; RCA #8420985- 2.
Quant i t i es of 1- 10.
Del i v er ed
Each
66
Di gi t al Mul t i met er .
Non- Li near Syst ems
I nc. Model M24.
f . o. b. dest i nat i on
Each
66
Os ci l l os cope, Tekt r oni x Model 535A, d. c.
t o 15 m. c . , wi t h i dent i cal hor i z ont al and
v er t i c al ampl i f i er s, t ype K and t ype Q;
wi t h camer a t o phot ogr aph t r ace, f . o. b.
f act or y
Each
66
Mi l i ohmet er , Kei t hl y Model
des t i nat i on
Each
66
Ac cel er omet er , CEC 4- 202- 0001 + 5G t o
+ 500G.
Opr . Temp. :
70 degr ee F t o
300 degr ee F.
Sensi t i vi t y: 0. 01 G/ G.
CEC pr i nt #4- 202- 0001, i nsul at i on, 500
Megohms, mi n. at 45 vol t s, mi n. at 45 vol t s
DC over c ompensat ed.
Temper at ur e r ange,
ex t er nal di m. appr ox. ( 1) one i nch, cube,
2 f oot of cabl e. Mf gr : Cons ol i dat ed El ect r o?*
dy nami cs Cor p.
Each
Mul t i - c hannel gamma Spec t r um Anal yz er and
Comput er .
512 c hannel anal yzer .
Nucl ear
Dat a, I nc. #130A
Each
66
66
#502.
f . o. b.
. 474
ELECTRONI C COMPONENTS
I n d u c e s all items in SI C Codes 3671, 3672,
3673, 3679, 3692, 3621553, and 3357413
FSC
Code
Speci f i c at i on
Uni t
59
Tube el ec t r on #5678 FSN: 5960- 230- 5262,
F3S: 34807# Del i ver ed
Each
59
Connect or : Amphenol t ype UG- 88/ u.
Pr i c e
appl i es t o 500 uni t s.
Del i v er ed
Each
59
Pot ent i omet er , 250 ohms, mi c r ot or que Model
85111, 360 di g. r ot at i on, 1. 52 wat t s, 5%
l i r . , t ype 10.
Quant i t y: 10
Each
59
Swi t ch, saf et y, encl osed, 30 amps, 230
vol t s, AC. , ex t er nal l y oper at ed, si ngl e
t hr ow, 3 pol e, 3 bl ade, 3 f use, t ype D,
si mi l ar cr equal t o Tr umbul l No. 24321,
Feder al No. 31332,
Ei ght t o t wel ve uni t s,
f . o. b. dest i nat i on
Each
59
Semi conduc t or di ode t ype 1N1169.
Di ode
Si l i con 0. 375 i n. di a. by 0. 750 i n. ov er
al l Di m.
2 t er mi nal s wi r e l ead t ype
her met i c al l y seal ed
Each
59
Resi st or var i abl e, J AN R- 19, t ype #RA20A,
FK201AK; st yl e RA20, 2 wat t s.
1 t o 10
Each
59
Connect or , pl ug, Cannon t ype WK- 5- 21C- 3/ 8.
f . o. b. des t i nat i on
Each
59
Capaci t or , 150 D, TUL Twi s t - Lok el ec t r o
l yt i c, 3/ 4" x 2 V.
Si ngl e uni t
Eac h
59
Rel ay, ar mat ur e: , Gener al pur pose;
her met i c al l y seal ed; mi ni at ur e; DPDT:
nomi nal DC v ol t age 24- 28V; t ype 6304/ 15- 2
i n ac c / w TSS sheet SCL- 6304A
Each
59
PN? ger mani um,
Del i v er ed
Each
59
Tr ansf or mer , Chi c ago t ype PCC- 40, Power 450
V. E. T. 1- 9.
f . o. b. des t i nat i on
t r ansi st or No.
☆
2N1224,
( 1- 99)
U.S. GOVERNMENT PRINTING OFFICE : 1975
Eac h
0 -5 9 4 -2 1 1
@FedFRASER