Community Perceptions of Unmeasured Quality Improvement in Goods and Services

Abstract

Because of the costs involved in such exercises, current productivity measures do not necessarily fully take into account changes in the quality of goods and services over time. This paper outlines the derivation of measures that lead to quantification of the “community preference for its perceptions of improved unmeasured quality” in products. The measures are based on the proposition that individuals behave in such a manner as to maximise their quality of life. This is expressed by the individual’s choices in her purchase of quantity, quality and type of goods and services. This choice reflects her particular trade-offs, given her level of spending. The government is responsive to the community’s choices in terms of the services it produces. In aggregate, this is expressed in an economy by the choice of goods and services purchased. The measures that are derived are not grounded in production theory, but the “payment for output” measure can be related to theory assuming competitive markets and profit maximising, efficient firms. This paper first shows the development of a “payment for output” of goods and services from an entity measure. From this the “community preference for output increases” measure was developed. Using the mining industry as a basis and the wholesaling industry as a check, a measure of changes in the “community preference for its perceptions of improved unmeasured quality” in other entities in an economy is derived. These two community preference measures for an entity are relative to what is on offer in the whole economy and are not absolute measures, in contrast to productivity (incorporating changes in measured quality) estimates. For Australia as a whole in the 1989-90 to 1998-99 period, the annual multifactor productivity (MFP) increase was 1.64 percent and the annual increase in community preference for its perceptions of improved unmeasured quality was 0.31 percent. The addition of the two measures therefore represents an increase of 19 percent on the MFP figure alone. A measure of the efficiency of an economy in responding to changing community preferences is also derived.Payment, productivity, quality, community, preference, efficiency