Are shocks to the terms of trade shocks to productivity?

Timothy J. Kehoe, Kim J. Ruhl

Research output: Contribution to journalArticlepeer-review

53 Scopus citations

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 GDP. 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.

Original languageEnglish (US)
Pages (from-to)804-819
Number of pages16
JournalReview of Economic Dynamics
Volume11
Issue number4
DOIs
StatePublished - Oct 1 2008

Keywords

  • Gross domestic product
  • National income accounting
  • Terms of trade
  • Total factor productivity

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