## Bias in U.S. Import Prices and Demand, Issue 4841Abstract: The purpose of the paper is to measure the potential bias in the U.S. import price index due to the appearance of new product varieties, or new foreign suppliers, and determine the effect of this bias on the estimated income elasticity of import demand. Existing import price indexes are based on a sample of products from importing firms. We argue that if the share of import expenditure on the sampled products is falling over time, this will lead to an upward bias in the measured index. Using a correction based on the falling expenditure share on sampled countries, we find that the income elasticity of aggregate U.S. import demand is reduced from 2.5 to 1.7, or about halfway to unity. Our estimates suggest that the aggregate import price index is upward biased by about one and one-half percentage points annually. |

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3-digit SITC categories 3-digit SITC industry Affiliates of Foreign aggregate import Aggregate U.S. Import Alterman arithmetic mean assumption below-average internal imports Benchmark Survey bias term BLS index Cobb-Douglas coefficient construct consumer price index conventional index Corollary elasticity of demand elasticity of substitution exact index exact price index expenditure on sampled expenditure shares Feenstra foreign capital stock foreign suppliers fourth regression geometric mean Helkie and Hooper import demand equation import price index included income elasticity industries with above-average industries with below-average instrumental variables internal manufacturing imports logarithmic mean measured motor vehicles obtained potential bias product varieties Proposition proxies pt.st-i quarterly dummies quarterly lags ratio Reinsdorf relative import price reservation price retail outlets sampled products share of expenditure SHARE variables SHARE2 SHARE2A and SHARE2B Shiells supplied TSUSA categories U.S. IMPORT PRICES U.S. multinationals U.S. Trade unit-cost function upward bias varieties iel/{n variety n vehicles and equipment weakly separable wholesale trade