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Adjusting Output and Productivity Indexes for Changes in the Terms of Trade

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  • W. Erwin Diewert
  • Catherine J. Morrison

Abstract

In this paper we employ index number theory in addressing the problem of adjusting real national income and real domestic product for changes in a country's terms of trade. More specifically, using recent developments in the theory of production, we address the problems related to measuring: (i) real output produced and real input utilized by the private business sector;(ii) productivity growth or technical change; (iii) the effects on domestic real output of changes in the terms of trade; and (iv) the impact on final sales to domestic purchasers of changes in the balance of payments deficit, in a consistent accounting framework.This treatment of international trade allows us to undertake comparative statics analyses using only production theory, whereas in the traditional paradigm which treats traded goods as perfectly substitutable with a class of domestic goods, a general equilibrium framework is required. We illustrate our suggested solutions using U.S. data for the years 1968-82.

Suggested Citation

  • W. Erwin 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.
    • Handle: RePEc:nbr:nberwo:1564
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    1. Robert B. Archibald, 1977. "On the Theory of Industrial Price Measurement Output Price Indexes," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 6, number 1, pages 57-72, National Bureau of Economic Research, Inc.
    2. Caves, Douglas W & Christensen, Laurits R & Diewert, W Erwin, 1982. "The Economic Theory of Index Numbers and the Measurement of Input, Output, and Productivity," Econometrica, Econometric Society, vol. 50(6), pages 1393-1414, November.
    3. Burgess, David F., 1974. "Production theory and the derived demand for imports," Journal of International Economics, Elsevier, vol. 4(2), pages 103-117, May.
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