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Trading Gains and Productivity: A Törnqvist Approach

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  • Ulrich Kohli

Abstract

This article looks at alternative Törnqvist measures of a country’s trading-gain and terms-of-trade effects, as they have been proposed in the literature starting with the seminal work of Diewert and Morrison (1986), and their link to standard measures of productivity. It strongly argues in favour of using the price of domestic final demand as a deflator when computing real Gross Domestic Income (GDI), and, by the same token, the trading gains and labour productivity measures. It shows that the trading gains then generally consist of two parts, a pure terms-of-trade component and an additional relative-price component, the latter of which can be interpreted as a real-exchange-rate effect. National and international statistical agencies, with the notable exceptions of Statistics Canada and the U.S. Bureau of Economic Analysis, tend to report incomplete trading-gain statistics in that they omit the second component. Consequently the real GDI estimates they publish must be viewed as flawed. Taking trading-gains into account has no direct effect on the measurement of total factor productivity, but it does affect the measures of average and marginal labour productivity when related to real GDI and its deflator. Numerical estimates for Switzerland are reported as an illustration.

Suggested Citation

  • Ulrich Kohli, 2022. "Trading Gains and Productivity: A Törnqvist Approach," International Productivity Monitor, Centre for the Study of Living Standards, vol. 42, pages 63-86, Spring.
    • Handle: RePEc:sls:ipmsls:v:42:y:2022:3
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    File URL: http://www.csls.ca/ipm/42/IPM_42_Kohli.pdf
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    References listed on IDEAS

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    1. Ulrich Kohli & Jean-Marc Natal, 2014. "The real exchange rate and the structure of aggregate production," Journal of Productivity Analysis, Springer, vol. 42(1), pages 1-13, August.
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    3. Ulrich Kohli, 2003. "Terms of trade, real GDP, and real value added: A new look at New Zealand's growth performance," New Zealand Economic Papers, Taylor & Francis Journals, vol. 37(1), pages 41-66.
    4. Marshall B. Reinsdorf, 2010. "Terms Of Trade Effects: Theory And Measurement," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 56(s1), pages 177-205, June.
    5. 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.
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    12. Ulrich Kohli, 2004. "An Implicit Törnqvist Index of Real GDP," Journal of Productivity Analysis, Springer, vol. 21(3), pages 337-353, May.
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    1. Nicholas Oulton, 2023. "The effect of changes in the terms of trade on GDP and welfare: A Divisia approach to the System of National Accounts," Manchester School, University of Manchester, vol. 91(4), pages 261-282, July.
    2. Abdul A. Erumban, 2023. "The Falling Productivity in West Asian Arab Countries Since the 1980s: Causes, Consequences, and Cures," International Productivity Monitor, Centre for the Study of Living Standards, vol. 44, pages 89-119, Fall.

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