Page 327 - Contributed Paper Session (CPS) - Volume 7

CPS2118 Yang Wang

Measuring Real GDP and Changes in the Terms of
Trade across Space and Time
Yan Wang
Dongbei University of Finance and Economics

Abstract
Larger international transactions and sharp changes in relative prices have
great effect on the estimates of national income and product. If we define the
terms of trade as the ratio of export price to import price, an improvement in
the terms of trade means that the country can get more for less. This
phenomenon is similar to a technological progress (Diewert and Morrison,
1986). Contrary to a technological progress, however, a change in the terms
of trade is treated by the national accounts as a price phenomenon, rather
than as a real effect. Consequently, the beneficial effect of an improvement in
the terms of trade is not taken into account by real GDP (Kohli, 2006). In this
paper we are trying to measure the real GDP on both output-side and
expenditure-side and the contribution of terms of trade to the real GDP
growth across space and time in a more consistent way. Based on production
theory and translog GDP methodology introduced by Diewert and Morrison
(1986), we further extend Inklaar and Diewert (2016)’s framework to
simultaneously calculate real GDP on expenditure-side and output-side and
isolate the effect of terms of trade on real GDP.

Keywords
Real GDP; Purchasing Power Parities (PPPs); Terms of trade; Production
theory

1. Introduction
Larger international transactions and sharp changes in relative prices have
great effect on the estimates of national income and product. These estimates
have been more sensitive to the choice of concepts and methodologies since
1970’s (Denison, 1981). The economic performance of Switzerland over the
long run is paradoxical. In most international comparisons, Switzerland is
found to have a growth rate that is significantly lower than that of other
industrialized nations. However, in terms of average living standards,
Switzerland always ranks among the top nations (Kohli, 2004). If we define the
terms of trade as the ratio of export price to import price, an improvement in
the terms of trade means that the country can get more for less. This
phenomenon is similar to a technological progress (Diewert and Morrison,
1986). Contrary to a technological progress, however, a change in the terms

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