Nothing Special   »   [go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/p/ehl/lserod/118693.html
   My bibliography  Save this paper

The effect of changes in the terms of trade on GDP and welfare: a Divisia approach to the system of national accounts

Author

Listed:
  • Oulton, Nicholas
Abstract
What effect, if any, do changes in the terms of trade have on the level of output (GDP) or welfare? I examine this issue through two versions of a textbook, Heckscher-Ohlin-Samuelson (HOS), two-good model of a small, open economy. In the first version both goods are for final consumption. In the second, one good is an imported intermediate input into the other. In both versions, economic theory suggests that an improvement in the terms of trade raises welfare (consumption) but leaves aggregate output (GDP) unchanged. I then show that a national income accountant applying the principles of the 2008 System of National Accounts (SNA) would reach the same conclusions. This follows from a continuous-time analysis using Divisia index numbers. However in the case where imports are intermediate inputs and competition is imperfect, an improvement in the terms of trade does raise GDP: the size of the effect depends on the size of the markup of price over marginal revenue. I argue that the continuous time Divisia approach is the right framework for national income accounting, even though it can only be implemented approximately in practice. If the aim is to find the best approximation to the Divisia index, then the chained Fisher index (as used in the US and Canadian national accounts) or the chained Törnqvist are better approximations than is the chained Laspeyres (as used in Europe).

Suggested Citation

  • Oulton, Nicholas, 2023. "The effect of changes in the terms of trade on GDP and welfare: a Divisia approach to the system of national accounts," LSE Research Online Documents on Economics 118693, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:118693
    as

    Download full text from publisher

    File URL: http://eprints.lse.ac.uk/118693/
    File Function: Open access version.
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Alan S. Blinder & Jeremy B. Rudd, 2013. "The Supply-Shock Explanation of the Great Stagflation Revisited," NBER Chapters, in: The Great Inflation: The Rebirth of Modern Central Banking, pages 119-175, National Bureau of Economic Research, Inc.
    2. Nicholas Oulton, 2023. "The effect of changes in the terms of trade on GDP and welfare: A Divisia approach to the System of National Accounts," Manchester School, University of Manchester, vol. 91(4), pages 261-282, July.
    3. Dale W. Jorgenson & Zvi Griliches, 1971. "Divisia Index Numbers And Productivity Measurement," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 17(2), pages 227-229, June.
    4. repec:bla:revinw:v:17:y:1971:i:2:p:227-29 is not listed on IDEAS
    5. Marshall B. Reinsdorf, 2010. "Terms Of Trade Effects: Theory And Measurement," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 56(s1), pages 177-205, June.
    6. Timothy J. Kehoe & Kim J. Ruhl, 2008. "Are Shocks to the Terms of Trade Shocks to Productivity?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(4), pages 804-819, October.
    7. Nicholas Oulton, 2012. "How To Measure Living Standards And Productivity," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 58(3), pages 424-456, September.
    8. Ulrich Kohli, 2006. "Real GDP, Real GDI and Trading Gains: Canada, 1981-2005," International Productivity Monitor, Centre for the Study of Living Standards, vol. 13, pages 46-56, Fall.
    9. Gita Gopinath & Brent Neiman, 2014. "Trade Adjustment and Productivity in Large Crises," American Economic Review, American Economic Association, vol. 104(3), pages 793-831, March.
    10. Dale W. Jorgenson, 2018. "Production and Welfare: Progress in Economic Measurement," Journal of Economic Literature, American Economic Association, vol. 56(3), pages 867-919, September.
    11. Ariel Burstein & Javier Cravino, 2015. "Measured Aggregate Gains from International Trade," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(2), pages 181-218, April.
    12. Jerry Hausman, 2003. "Sources of Bias and Solutions to Bias in the Consumer Price Index," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 23-44, Winter.
    13. Oulton, Nicholas, 2008. "Chain indices of the cost-of-living and the path-dependence problem: An empirical solution," Journal of Econometrics, Elsevier, vol. 144(1), pages 306-324, May.
    14. Deaton,Angus & Muellbauer,John, 1980. "Economics and Consumer Behavior," Cambridge Books, Cambridge University Press, number 9780521296762.
    15. Nicholas Oulton, 2004. "Productivity Versus Welfare; Or GDP Versus Weitzman's NDP," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 50(3), pages 329-355, September.
    16. Diewart, W Erwin & Morrison, Catherine J, 1986. "Adjusting Output and Productivity Indexes for Changes in the Terms of Trade," Economic Journal, Royal Economic Society, vol. 96(383), pages 659-679, September.
    17. David Rezza Baqaee & Emmanuel Farhi, 2019. "The Macroeconomic Impact of Microeconomic Shocks: Beyond Hulten's Theorem," Econometrica, Econometric Society, vol. 87(4), pages 1155-1203, July.
    18. Basu, Susanto & Fernald, John G., 2002. "Aggregate productivity and aggregate technology," European Economic Review, Elsevier, vol. 46(6), pages 963-991, June.
    19. Oulton, Nicholas, 2012. "Long term implications of the ICT revolution: Applying the lessons of growth theory and growth accounting," Economic Modelling, Elsevier, vol. 29(5), pages 1722-1736.
    20. Hideyuki Mizobuchi & Valentin Zelenyuk, 2021. "Quadratic-mean-of-order-r indexes of output, input and productivity," Journal of Productivity Analysis, Springer, vol. 56(2), pages 133-138, December.
    21. Robert B. Barsky & Lutz Kilian, 2002. "Do We Really Know That Oil Caused the Great Stagflation? A Monetary Alternative," NBER Chapters, in: NBER Macroeconomics Annual 2001, Volume 16, pages 137-198, National Bureau of Economic Research, Inc.
    22. Duernecker, Georg & Herrendorf, Berthold & Valentinyi, Ákos, 2021. "The productivity growth slowdown and Kaldor’s growth facts," Journal of Economic Dynamics and Control, Elsevier, vol. 130(C).
    23. Hill, Robert J., 2006. "Superlative index numbers: not all of them are super," Journal of Econometrics, Elsevier, vol. 130(1), pages 25-43, January.
    24. Kevin Fox & Ulrich Kohli, 1998. "GDP growth, terms-of-trade effects, and total factor productivity," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 7(1), pages 87-110.
    25. repec:pri:cepsud:176blinder is not listed on IDEAS
    26. Timothy J. Kehoe & Kim J. Ruhl, 2008. "Are Shocks to the Terms of Trade Shocks to Productivity?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(4), pages 804-819, October.
    27. J. A. Sefton & M. R. Weale, 2006. "The Concept of Income in a General Equilibrium," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 73(1), pages 219-249.
    28. Ulrich Kohli, 2022. "Trading Gains and Productivity: A Törnqvist Approach," International Productivity Monitor, Centre for the Study of Living Standards, vol. 42, pages 63-86, Spring.
    29. D. W. Jorgenson & Z. Griliches, 1967. "The Explanation of Productivity Change," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 34(3), pages 249-283.
    30. Martin L. Weitzman, 1976. "On the Welfare Significance of National Product in a Dynamic Economy," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 90(1), pages 156-162.
    31. J. R. Hicks, 1945. "The Generalised Theory of Consumer's Surplus," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 13(2), pages 68-74.
    32. Hall, Robert E, 1988. "The Relation between Price and Marginal Cost in U.S. Industry," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 921-947, October.
    33. Samuelson, Paul A & Swamy, S, 1974. "Invariant Economic Index Numbers and Canonical Duality: Survey and Synthesis," American Economic Review, American Economic Association, vol. 64(4), pages 566-593, September.
    34. Hulten, Charles R, 1973. "Divisia Index Numbers," Econometrica, Econometric Society, vol. 41(6), pages 1017-1025, November.
    35. Bert M. Balk, 2005. "Divisia price and quantity indices: 80 years after," Statistica Neerlandica, Netherlands Society for Statistics and Operations Research, vol. 59(2), pages 119-158, May.
    36. Diewert, W. E., 1976. "Exact and superlative index numbers," Journal of Econometrics, Elsevier, vol. 4(2), pages 115-145, May.
    37. Alan S. Blinder & Jeremy B. Rudd, 2013. "The Supply-Shock Explanation of the Great Stagflation Revisited," NBER Chapters, in: The Great Inflation: The Rebirth of Modern Central Banking, pages 119-175, National Bureau of Economic Research, Inc.
    38. Michael Bruno & Jeffrey D. Sachs, 1985. "Economics of Worldwide Stagflation," NBER Books, National Bureau of Economic Research, Inc, number brun85-1.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Nicholas Oulton, 2023. "The effect of changes in the terms of trade on GDP and welfare: A Divisia approach to the System of National Accounts," Manchester School, University of Manchester, vol. 91(4), pages 261-282, July.
    2. Samuel Erasmus ALNAA & Juabin MATEY, 2024. "Assessing the Effects of Macroeconomic Variables on Economic Welfare in Ghana," Management and Economics Review, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 9(1), pages 138-157, February.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Nicholas Oulton, 2021. "The effect of changes in the terms of trade on GDP and welfare: a Divisia approach to the SNA," Discussion Papers 2126, Centre for Macroeconomics (CFM).
    2. Nicholas Outlon, 2019. "GDP is a measure of output, not welfare. Or, HOS meets the SNA," Discussion Papers 1906, Centre for Macroeconomics (CFM).
    3. Nicholas Oulton, 2022. "The Divisia approach to measuring output and productivity: with an application to the BEA-BLS integrated industry-level production account, 1987-2020," Discussion Papers 2217, Centre for Macroeconomics (CFM).
    4. Hulten, Charles R., 2010. "Growth Accounting," Handbook of the Economics of Innovation, in: Bronwyn H. Hall & Nathan Rosenberg (ed.), Handbook of the Economics of Innovation, edition 1, volume 2, chapter 0, pages 987-1031, Elsevier.
    5. Nicholas Oulton, 2012. "How To Measure Living Standards And Productivity," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 58(3), pages 424-456, September.
    6. Guido Sandleris & Mark L. J. Wright, 2014. "The Costs of Financial Crises: Resource Misallocation, Productivity, and Welfare in the 2001 Argentine Crisis," Scandinavian Journal of Economics, Wiley Blackwell, vol. 116(1), pages 87-127, January.
    7. François de Soyres, 2016. "Value Added and Productivity Linkages Across Countries," Working Papers 209, Oesterreichische Nationalbank (Austrian Central Bank).
    8. Marshall B. Reinsdorf, 2010. "Terms Of Trade Effects: Theory And Measurement," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 56(s1), pages 177-205, June.
    9. Cao, Shutao, 2017. "Accounting for productivity growth in a small open economy: Sector-specific technological change and relative prices of trade," Working Paper Series 6203, Victoria University of Wellington, School of Economics and Finance.
    10. Francois de Soyres & Alexandre Gaillard & Henry L. Young, 2023. "What is Measured in National Accounts?," International Finance Discussion Papers 1375, Board of Governors of the Federal Reserve System (U.S.).
    11. Diewert, Erwin & Fox, Kevin J., 2019. "Productivity Indexes and National Statistics: Theory, Methods and Challenges," Microeconomics.ca working papers erwin_diewert-2019-8, Vancouver School of Economics, revised 25 Apr 2019.
    12. Cao, Shutao, 2017. "Accounting for productivity growth in a small open economy: Sector-specific technological change and relative prices of trade," Working Paper Series 20152, Victoria University of Wellington, School of Economics and Finance.
    13. Charles R. Hulten & Paul Schreyer, 2010. "GDP, Technical Change, and the Measurement of Net Income: the Weitzman Model Revisited," NBER Working Papers 16010, National Bureau of Economic Research, Inc.
    14. Charles R. Hulten, 2000. "Total Factor Productivity: A Short Biography," NBER Working Papers 7471, National Bureau of Economic Research, Inc.
    15. Ulrich Kohli, 2022. "Trading Gains and Productivity: A Törnqvist Approach," International Productivity Monitor, Centre for the Study of Living Standards, vol. 42, pages 63-86, Spring.
    16. Amil Petrin & James Levinsohn, 2005. "Measuring Aggregate Productivity Growth Using Plant-Level Data," NBER Working Papers 11887, National Bureau of Economic Research, Inc.
    17. Charles R. Hulten & Leonard I. Nakamura, 2017. "Accounting for Growth in the Age of the Internet The Importance of Output-Saving Technical Change," Working Papers 17-24, Federal Reserve Bank of Philadelphia.
    18. Gregory Kurtzon, 2022. "How much does formula versus chaining matter for a cost‐of‐living index? The CPI‐U versus the C‐CPI‐U," Economic Inquiry, Western Economic Association International, vol. 60(2), pages 645-667, April.
    19. Francois de Soyres, 2016. "Trade and Interdependence in International Networks," 2016 Meeting Papers 157, Society for Economic Dynamics.
    20. Ariel Burstein & Javier Cravino, 2015. "Measured Aggregate Gains from International Trade," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(2), pages 181-218, April.

    More about this item

    Keywords

    Divisia; GDP; Heckscher-Ohlin-Samuelson; SNA; terms of trade; welfare;
    All these keywords.

    JEL classification:

    • J1 - Labor and Demographic Economics - - Demographic Economics

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ehl:lserod:118693. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: LSERO Manager (email available below). General contact details of provider: https://edirc.repec.org/data/lsepsuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.