Page 328 - Contributed Paper Session (CPS) - Volume 7

CPS2118 Yang Wang
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).
SNA (1993) first introduce the concept of real GDP based on production
approach and expenditure approach to take into account the terms of trade.
There are two main approaches to measuring the Real GDP on output-side
and expenditure-side and the terms of trade. The first approach is to focus on
temporal changes in the terms of trade from the perspective of national
accounts. However, it is difficult to measure the total effect made by the
international trade and the consequent price movement on production and
consumption based only on an economy’s national accounting data. The
second approach is to investigate the changes in the terms of trade across
time and space from the perspective of international comparison. Latest
version of PWT uses two sets of indexes called CGDP and RGDP to measure
the real GDP on output-side and expenditure-side, but there are still questions
to ask: (1) The implicit PPP based on Fisher quantity index may not be
transitive. (2) We can’t decompose the Fisher quantity index into meaningful
parts to directly measure the effect of terms of trade. 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.

2. Literature Review
2.1 National practice
Since 1981, the U.S. Bureau of Economic Analysis publishes series of what
has become known as ‘‘Command-Basis’’ GNP. Command-Basis GNP (GDP) is
a measure of real GNP (GDP) that tries to take into account the effects of
changes in the terms of trade on the purchasing power of a nation.
BEA use import price index to deflate the trade account. Canada and Swiss
National Bank use Gross Domestic Final Expenditure (GDFE) to deflate the
trade account.
2.2 The SNA approach
SNA (1993) first introduce the concept of real GDP based on production
approach and expenditure approach to take into account the terms of trade.
According to SNA, the production approach measures the real GDP in a way
to measure an economy’s production capability and its production possibility
frontier; The expenditure approach measures the real GDP in a way to measure
an economy’s real purchasing power and living standard (SNA, 1993).

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