Working Paper: NBER ID: w1564
Authors: W. Erwin Diewert; Catherine J. Morrison
Abstract: In this paper we employ index number theory in addressing the problem of adjusting real national income and real domestic product for changes in a country's terms of trade. More specifically, using recent developments in the theory of production, we address the problems related to measuring: (i) real output produced and real input utilized by the private business sector;(ii) productivity growth or technical change; (iii) the effects on domestic real output of changes in the terms of trade; and (iv) the impact on final sales to domestic purchasers of changes in the balance of payments deficit, in a consistent accounting framework.This treatment of international trade allows us to undertake comparative statics analyses using only production theory, whereas in the traditional paradigm which treats traded goods as perfectly substitutable with a class of domestic goods, a general equilibrium framework is required. We illustrate our suggested solutions using U.S. data for the years 1968-82.
Keywords: Terms of Trade; Productivity Indexes; National Income Accounting; Economic Theory
JEL Codes: D24; E01; O47
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increase in the price of exports relative to imports (F14) | increase in domestic production (E23) |
| changes in the terms of trade (F14) | affect domestic real output (F69) |
| changes in the balance of payments deficit (F32) | significant shifts in domestic sales figures (F61) |