Working Paper: NBER ID: w13111
Authors: Timothy J. Kehoe; Kim J. Ruhl
Abstract: International trade is frequently thought of as a production technology in which the inputs are exports and the outputs are imports. Exports are transformed into imports at the rate of the price of exports relative to the price of imports: the reciprocal of the terms of trade. Cast this way, a change in the terms of trade acts as a productivity shock. Or does it? In this paper, we show that this line of reasoning cannot work in standard models. Starting with a simple model and then generalizing, we show that changes in the terms of trade have no first-order effect on productivity when output is measured as chain-weighted real gross domestic product. The terms of trade do affect real income and consumption in a country, and we show how measures of real income change with the terms of trade at business cycle frequencies and during financial crises.
Keywords: No keywords provided
JEL Codes: E23; F41; F43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| terms of trade shocks (F14) | real income (D31) |
| terms of trade shocks (F14) | consumption (E21) |
| terms of trade shocks (F14) | total factor productivity (TFP) (D24) |
| deterioration in terms of trade (F14) | declines in real GDP (E20) |
| negative terms of trade shock (F14) | increase in real GDP (E20) |
| terms of trade shocks (F14) | productivity declines (O49) |