Effects of Terms of Trade Gains and Tariff Changes on the Measurement of U.S. Productivity Growth

1. Effects of Terms of Trade Gains and Tariff Changes on the Measurement of U.S. Productivity Growth Rob Feenstra, UC Davis Marshall Reinsdorf, BEA Matt Slaughter, Dartmouth 2008 World Congress on National Accounts and Economic Performance Measures for Nations Rosslyn, Virginia May 13, 2008

2. Motivation for Paper • US productivity speedup of 1 percent per year starting in 1995, with ITC as key driver. • Trading gains can look like productivity gains. • Growth of imports may have price driver. • Multilateral elimination of tariffs on ITC goods over 1997-1999 under the WTO Information Technology Agreement. • Improvement in non-petroleum terms of trade coincided with the productivity speedup.

3. Globalization of ITC Industry

5. Trade in GDP • In current dollars, GDP = D + X – M, where D = C+I+G, “gross domestic purchases” or “domestic absorption.” • Diewert and Morrison’s (1986) GDP function treats M as intermediate inputs and D and X as outputs. • Can also think of GDP as consolidated Value Added for the whole economy in which the domestic intermediate inputs cancel out (but note that M is measured at tariff-free prices in calculating GDP.)

6. Terms of Trade Effects can Resemble Productivity Effects Terms of Trade defined as PX/PM,where PGDPsDPD + sXPx – sMPM. • Real income depends on production (GDP) and on gains from trade, which grow when terms of trade improve. • Improved terms of trade raise nominal GDP and the real D attainable for a given current account balance, ceteris paribus.

7. Change in Terms of Trade from PP to P¢P¢ Reduces Real Consumption from D to D¢ but Shift in Production from A to A¢ has no Effect on Real GDP

8. Theory of Productivity Measurement with International Trade

9. Tariff Revenue in GDP

11. Theoretical Measures of Productivity

12. Measure of True Productivity

13. Adjustment for Net Entry of Varieties from New Supplying Countries

14. Conventional TFP – True Productivity

15. Estimation of Influence of Unmeasured Gains from Trade on GDP/Productivity BEA aggregates Laspeyres indexes from BLS to find deflators for exports/imports in GDP. We calculate alternative versions of the indexes used by BEA to construct deflators. To aggregate our indexes, we use weights from the NIPAs and Fisher index formula. Removing nonmarket sectors of GDP leaves Value Added of Private Business, the output part of aggregate productivity calculation.

16. Three Kinds of Corrections Tested Törnqvist rather than Laspeyres formula for deflators of trade components of GDP. Tariff-inclusive weights and index for M. Adjust PM for net entry of new countries supplying imports using CES formula.

17. Nonpetroleum terms of trade before taking account of BEA’s use of Fisher

18. Example of Detailed Indexes: Semiconductor Imports

19. Example of Detailed Indexes: Semiconductor Exports

20. Telecom Equipment Imports

21. Telecom Equipment Exports

22. Effects on Price Indexes (Averages for 1996-1999)

24. Effects on Measures of GDP and Productivity • Reduction in real GDP growth is about 0.1 percent per year after 1995 (allowing for lack of effect of capital goods & tariffs.) • Growth rate of price index for private business value added increased by 0.2%/year. • Growth of productivity reduced by almost 0.2 %/year, a fifth of the productivity speedup.

25. Price and Volume Indexes for GDP and Value Added of Private Business

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