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GDP is a measure of output, not welfare: or, HOS meets the SNA

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  • Oulton, Nicholas

Abstract

What effect, if any, do changes in the terms of trade have on the level of output (GDP) or welfare? I examine this issue through two versions of a textbook, Hecksher-Ohlin-Samuelson (HOS), two-good model of a small, open economy. In the first version both goods are for final consumption. In the second, one good is an imported intermediate input into the other. In both versions, economic theory suggests that an improvement in the terms of trade raises welfare (consumption) but leaves aggregate output (GDP) unchanged. This follows from a continuous-time analysis using Divisia index numbers. I then show that a national income accountant applying the principles of the 2008 System of National Accounts (SNA) would reach the same conclusions.

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  • Oulton, Nicholas, 2019. "GDP is a measure of output, not welfare: or, HOS meets the SNA," LSE Research Online Documents on Economics 100945, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:100945
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    More about this item

    Keywords

    GDP; welfare; SNA; Hecksher-Ohlin-Samuelson; terms of trade; Divisia;
    All these keywords.

    JEL classification:

    • E01 - Macroeconomics and Monetary Economics - - General - - - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • D60 - Microeconomics - - Welfare Economics - - - General

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