Page 330 - Contributed Paper Session (CPS) - Volume 7

CPS2118 Yang Wang
and translog GDP methodology introduced by Diewert and Morrison (1986),
Inklaar and Diewert (2016) proposed a new method for simultaneously
comparing real value added and input quantity, which can be used to compare
industry productivity across countries and over time. 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.

3. Measurement Framework
3.1 Production theory
In the modern international trade, the majority of trade consists of raw
materials and intermediate goods. So-called finished imports cannot be
treated as final products, because they are not ready to meet final demand.
These kinds of imports must still go through unloading, transporting,
repackaging, wholesaling, and retailing in the domestic countries. During this
process, domestic factor services are added into these products, so that a
significant proportion of their final price tag is generally accounted for by
domestic activities (Kohli, 2004).
3.2 Translog GDP methodology
Given a vector of output prices P and a vector of available primary inputs
x, GDP function can be defined as:

g P x  t ( , ) max y P y y x t  Where P  (P D ,P X ,P M ) (3)
( , ) belong to S
Real income generated can be measured by using real output price vector p:
Y  g p ( P D , P X , P M ) (4)
t
( , ) x Where p 
t * * *
P P P
p
Diewert (2008) indicated that if the GDP function g t ( , ) x has the following tra
nslog form, we can decompose the change in real income into meaningful p
arts by index number.

t 
t 
i
j
n
0
Ing t ( , )p x  a  i a t i ln p  (1/ 2) i   j a ij ln p i t ln p  n b t n ln x  (1/ 2) n   m b nm ln x t n ln x t m
t
t
  i  n c in ln p i t ln x t n where ,i j  ( , ,D X M )
(5)
3.3 Decomposition method by Diewert (2008)
Diewert (2008) showed that when using production theory and translog GDP
methodology, the change in real income can be decomposed into：

(6)

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