Terms-of-Trade Changes, Real GDP, and Real Value Added in the Open Economy: Reassessing Hong Kong's Growth Performance
Real GDP tends to underestimate the increase in real domestic value added, real GDI, and welfare when the terms of trade improve. An improvement in the terms of trade is similar to a technological progress. The national accounts treat the two phenomena very unevenly, however, with a change in the terms of trade considered to be a price event and thus not incorporated in the computation of real GDP. The impact of a change in the real exchange rate on real value added is not taken into account by real GDP either. Given its extreme openness and in view of the massive terms-of-trade improvements that it has enjoyed over the past forty years, Hong Kong makes for an interesting case study. Our findings suggest that average real growth has been underestimated by real GDP by approximated 0.4% per annum between 1961 and 2003. This adds up to a gap of close to 20% of GDP over the entire period.
|Date of creation:||Mar 2006|
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