Effects of terms of trade gains and tariff changes on the measurement of u s productivity growth
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Effects of Terms of Trade Gains and Tariff Changes on the Measurement of U.S. Productivity Growth. Rob Feenstra, UC Davis Marshall Reinsdorf, BEA Matt Slaughter, Dartmouth 2008 World Congress on National Accounts and Economic Performance Measures for Nations Rosslyn, Virginia May 13, 2008.

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Effects of terms of trade gains and tariff changes on the measurement of u s productivity growth

Effects of Terms of Trade Gains and Tariff Changes on the Measurement of U.S. Productivity Growth

Rob Feenstra, UC Davis

Marshall Reinsdorf, BEA

Matt Slaughter, Dartmouth

2008 World Congress on National Accounts and Economic Performance Measures for Nations

Rosslyn, Virginia

May 13, 2008


Motivation for paper
Motivation for Paper Measurement of U.S. Productivity Growth

  • US productivity speedup of 1 percent per year starting in 1995, with ITC as key driver.

  • Trading gains can look like productivity gains.

  • Growth of imports may have price driver.

  • Multilateral elimination of tariffs on ITC goods over 1997-1999 under the WTO Information Technology Agreement.

  • Improvement in non-petroleum terms of trade coincided with the productivity speedup.


Globalization of itc industry
Globalization of ITC Industry Measurement of U.S. Productivity Growth


Trade in gdp
Trade in GDP Measurement of U.S. Productivity Growth

  • In current dollars, GDP = D + X – M,

    where D = C+I+G, “gross domestic purchases” or “domestic absorption.”

  • Diewert and Morrison’s (1986) GDP function treats M as intermediate inputs and D and X as outputs.

  • Can also think of GDP as consolidated Value Added for the whole economy in which the domestic intermediate inputs cancel out (but note that M is measured at tariff-free prices in calculating GDP.)


Terms of trade effects can resemble productivity effects
Terms of Trade Effects can Resemble Productivity Effects Measurement of U.S. Productivity Growth

Terms of Trade defined as PX/PM,where PGDPsDPD + sXPx – sMPM.

  • Real income depends on production (GDP) and on gains from trade, which grow when terms of trade improve.

  • Improved terms of trade raise nominal GDP and the real D attainable for a given current account balance, ceteris paribus.


Change in Terms of Trade from PP to P Measurement of U.S. Productivity Growth ¢P¢ Reduces Real Consumption from D to D¢ but Shift in Production from A to A¢ has no Effect on Real GDP


Theory of productivity measurement with international trade
Theory of Productivity Measurement Measurement of U.S. Productivity Growth with International Trade


Tariff revenue in gdp
Tariff Revenue in GDP Measurement of U.S. Productivity Growth


Theoretical measures of productivity
Theoretical Measures of Productivity Measurement of U.S. Productivity Growth


Measure of true productivity
Measure of True Productivity Measurement of U.S. Productivity Growth



Conventional tfp true productivity
Conventional TFP Countries– True Productivity


Estimation of influence of unmeasured gains from trade on gdp productivity
Estimation of Influence of Unmeasured CountriesGains from Trade on GDP/Productivity

BEA aggregates Laspeyres indexes from BLS to find deflators for exports/imports in GDP.

We calculate alternative versions of the indexes used by BEA to construct deflators.

To aggregate our indexes, we use weights from the NIPAs and Fisher index formula.

Removing nonmarket sectors of GDP leaves Value Added of Private Business, the output part of aggregate productivity calculation.


Three kinds of corrections tested
Three Kinds of Corrections Tested Countries

Törnqvist rather than Laspeyres formula for deflators of trade components of GDP.

Tariff-inclusive weights and index for M.

Adjust PM for net entry of new countries supplying imports using CES formula.







Effects on price indexes averages for 1996 1999
Effects on Price Indexes use of Fisher (Averages for 1996-1999)


Effects on measures of gdp and productivity
Effects on Measures of GDP and Productivity use of Fisher

  • Reduction in real GDP growth is about 0.1 percent per year after 1995 (allowing for lack of effect of capital goods & tariffs.)

  • Growth rate of price index for private business value added increased by 0.2%/year.

  • Growth of productivity reduced by almost 0.2 %/year, a fifth of the productivity speedup.



End Business


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