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

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  • W.E. 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.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1564.

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Date of creation: Feb 1985
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Publication status: published as Diewert, W. Erwin and Catherine J. Morrison. "Adjusting Output and Productivity Indexes for Changes in the Terms of Trade," Economic Journal, Vol. 94, No. 3, Sept. 1986, pp. 659-679.
Handle: RePEc:nbr:nberwo:1564

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  1. 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, Econometric Society, vol. 50(6), pages 1393-1414, November.
  2. Burgess, David F., 1974. "Production theory and the derived demand for imports," Journal of International Economics, Elsevier, Elsevier, vol. 4(2), pages 103-117, May.
  3. 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.
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