Industry-level Output Price Indexes for R&D: An Input-cost Approach with R&D Productivity Adjustment

The expanding recognition of intangible assets in the production of economic output brings renewed attention to difficult measurement issues. Price and quantity measures are needed to incorporate these components of real investment in the national accounts. This paper describes the construction of industry-specific R&D price indexes that deflate nominal R&D output and investment in the absence of market prices and quantity measures. Building from a standard input cost approach we include a transparent adjustment for the unobserved productivity of the innovator. Our simple model says that the growth rate in R&D can, on average, be best understood by the growth rate in R&D inputs plus the growth rate in productivity in the conduct of R&D. The key question we face is the measure of productivity change in the production of R&D activity. Because we have very limited empirical evidence and the range of informed opinion varies very broadly, this is the most difficult question we face. We choose a broad economy-wide measure of multifactor productivity from the Bureau of Labor Statistics.