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Are Shocks to the Terms of Trade Shocks to Productivity?

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  • Timothy J. Kehoe

    (University of Minnesota)

  • Kim J. Ruhl

    (University of Texas, Austin)

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. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2008.04.001
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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 11 (2008)
Issue (Month): 4 (October)
Pages: 804-819

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Handle: RePEc:red:issued:07-40

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Keywords: Terms of trade; Gross domestic product; Total factor productivity; National income accounting;

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References

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  1. Kohli, Ulrich, 2004. "Real GDP, real domestic income, and terms-of-trade changes," Journal of International Economics, Elsevier, vol. 62(1), pages 83-106, January.
  2. Paolo Mauro & Törbjörn I. Becker, 2006. "Output Drops and the Shocks That Matter," IMF Working Papers 06/172, International Monetary Fund.
  3. Easterly, William & Kremer, Michael & Pritchett, Lant & Summers, Lawrence H., 1993. "Good policy or good luck?: Country growth performance and temporary shocks," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 459-483, December.
  4. Richard Blundell & Thomas MaCurdy, 1998. "Labour supply: a review of alternative approaches," IFS Working Papers W98/18, Institute for Fiscal Studies.
  5. Rogerson, Richard & Wallenius, Johanna, 2009. "Micro and macro elasticities in a life cycle model with taxes," Journal of Economic Theory, Elsevier, vol. 144(6), pages 2277-2292, November.
  6. Hamilton, James D, 1983. "Oil and the Macroeconomy since World War II," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 228-48, April.
  7. Felipe Meza & Erwan Quintin, 2005. "Financial crises and total factor productivity," Center for Latin America Working Papers 0105, Federal Reserve Bank of Dallas.
  8. Feenstra, Robert C. & Heston, Alan & Timmer, Marcel P. & Deng, Haiyan, 2007. "Estimating Real Production and Expenditures Across Nations: A Proposal for Improving the Penn World Tables," GGDC Research Memorandum GD-95, Groningen Growth and Development Centre, University of Groningen.
  9. W.E. Diewert & Catherine J. Morrison, 1985. "Adjusting Output and Productivity Indexes for Changes in the Terms of Trade," NBER Working Papers 1564, National Bureau of Economic Research, Inc.
  10. Enrique G. Mendoza, 2006. "Endogenous Sudden Stops in a Business Cycle Model with Collateral Constraints:A Fisherian Deflation of Tobin's Q," NBER Working Papers 12564, National Bureau of Economic Research, Inc.
  11. Timothy J. Kehoe & Kim J. Ruhl, 2005. "Is Switzerland in a Great Depression?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(3), pages 759-775, July.
  12. Timothy J. Kehoe & Kim J. Ruhl, 2008. "Sudden stops, sectoral reallocations, and the real exchange rate," Staff Report 414, Federal Reserve Bank of Minneapolis.
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