Terms of Trade Effects: Theory and Methods of Measurement - Softcover

Reinsdorf, Marshall

Softcover

ISBN 10: 1288732023 ISBN 13: 9781288732029

Publisher: Bibliogov, 2013

Synopsis

Foreign trade enables a nation to consume a different mix of goods and services than it produces, so
to measure real gross domestic income (GDI) for an open economy, we must deflate by an index of
the prices of the things that this income is used to buy, not the price index for GDP. The differences
between these two indexes come from the export and import components of the GDP, and are
measured by the trading gains index. Fisher indexes are a natural way to estimate the conceptual
economic indexes of trading gains and real GDI because they are averages of the theoretical upper
and lower bounds of the economic indexes. They can be decomposed in a way that permits analyses
of the factors driving changes in trading gains, such as changes in the terms of trade and in the
relative price of tradables, or changes in the prices of particular commodities. Applying these
methods to the United States, we find that trading gains have a median absolute effect on US real
GDI of 0.2 percentage points in annual data. The petroleum price shocks that occurred in late 1973
and in 1980 subtracted more than a full percentage point from the annual growth of real GDI, and in
the first half of 2008 price increases in petroleum and other imported commodities subtracted 2
percentage points from the annual rate of growth of real GDI, making it negative despite the steady
growth of real GDP. On the other hand, with petroleum prices excluded, US terms of trade begin to
improve steadily starting in 1995 and the relative price of tradables falls. These effects increase the
growth rate of US real GDI by 0.15 percent per year on average.

Edition details

• Publisher: Bibliogov
• Publication date: 2013
• Language: English
• ISBN 10: 1288732023
• ISBN 13: 9781288732029
• Binding: Paperback
• Number of pages: 46