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Terms-of-Trade Changes, Real GDP, and Real Value Added in the Open Economy: Reassessing Hong Kong's Growth Performance

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Listed:
  • Ulrich Kohli

    (Swiss National Bank)

Abstract

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.

Suggested Citation

  • Ulrich Kohli, 2006. "Terms-of-Trade Changes, Real GDP, and Real Value Added in the Open Economy: Reassessing Hong Kong's Growth Performance," Working Papers 052006, Hong Kong Institute for Monetary Research.
  • Handle: RePEc:hkm:wpaper:052006
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    References listed on IDEAS

    as
    1. Christensen, Laurits R & Jorgenson, Dale W & Lau, Lawrence J, 1973. "Transcendental Logarithmic Production Frontiers," The Review of Economics and Statistics, MIT Press, vol. 55(1), pages 28-45, February.
    2. Robert C. Feenstra & Alan Heston & Marcel P. Timmer & Haiyan Deng, 2009. "Estimating Real Production and Expenditures across Nations: A Proposal for Improving the Penn World Tables," The Review of Economics and Statistics, MIT Press, vol. 91(1), pages 201-212, February.
    3. Ulrich R. Kohli, 1978. "A Gross National Product Function and the Derived Demand for Imports and Supply of Exports," Canadian Journal of Economics, Canadian Economics Association, vol. 11(2), pages 167-182, May.
    4. Diewart, W Erwin & Morrison, Catherine J, 1986. "Adjusting Output and Productivity Indexes for Changes in the Terms of Trade," Economic Journal, Royal Economic Society, vol. 96(383), pages 659-679, September.
    5. Diewert, W. E., 1976. "Exact and superlative index numbers," Journal of Econometrics, Elsevier, vol. 4(2), pages 115-145, May.
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    Citations

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    Cited by:

    1. Ryan Macdonald, 2010. "Real Gross Domestic Income, Relative Prices, And Economic Performance Across The Oecd," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 56(3), pages 498-518, September.

    More about this item

    Keywords

    Terms of trade; real exchange rate; real GDP; real GDI; real value added; technological change; total factor productivity; index numbers;

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade

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