In order to reflect changes in real values of inputs and outputs, measures of productivity should take quality changes in both into account. This is usually achieved by ensuring that the price indices used for deflation are adjusted for these quality changes. At the most basic level, volume measures are regarded as a combination of quantity and quality.
This chapter discusses the principles of quality adjustment, the practical issues encountered in quality adjustment within the market sector side, and the limits these impose on productivity measures. It also considers how these principles can be applied when considering productivity in government services.
The main focus here is on quality adjustments to output measures, but the principles apply equally to inputs.