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 language | English (US) |
|---|---|
| Pages (from-to) | 804-819 |
| Number of pages | 16 |
| Journal | Review of Economic Dynamics |
| Volume | 11 |
| Issue number | 4 |
| DOIs | |
| State | Published - Oct 2008 |
Bibliographical note
Funding Information:✩ This work was undertaken with the support of the National Science Foundation under Grant SES-0536970. The data used in this paper are available at http://www.econ.umn.edu/~tkehoe and at http://www.eco.utexas.edu/~kjr296. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. * Corresponding author at: University of Minnesota, 4-101 Hanson Hall, Minneapolis, MN, USA. E-mail address: tkehoe@econ.umn.edu (T.J. Kehoe).
Keywords
- Gross domestic product
- National income accounting
- Terms of trade
- Total factor productivity
