Are shocks to the terms of trade shocks to productivity?
AbstractInternational 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.
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Bibliographic InfoPaper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 391.
Date of creation: 2007
Date of revision:
Other versions of this item:
- Timothy J. Kehoe & Kim J. Ruhl, 2008. "Are Shocks to the Terms of Trade Shocks to Productivity?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(4), pages 804-819, October.
- Timothy J. Kehoe & Kim J. Ruhl, 2007. "Are Shocks to the Terms of Trade Shocks to Productivity?," NBER Working Papers 13111, National Bureau of Economic Research, Inc.
- E23 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Production
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
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