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Micro-economic Analysis
Division
‘Real’ Income, Terms of Trade and
Economic Performance
Ryan Macdonald
Micro-economic Analysis Division
Statistics Canada
15 May 2008
Micro-economic Analysis
Division
‘Real’ income measurement


Measuring ‘real’ income has concerned economists
and national accountants for many years
Two aspects of real income are dealt with in the
1993 System of National Accounts


Net income from abroad
Trading gain
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Micro-economic Analysis
Division
Real’ income measurement

Extensive literature


See for example (Geary 1961, Stuvel 1959, Nicholson 1960,
Courbis 1969, Kubayashi 1971, Dennison 1981, Silver and
Mahdavy 1989 , SNA 1993, Kohli 2006)
Important terms to include for ‘real’ income measurement,
particularly the trading gain


Driven by terms of trade shifts in most cases
Similar effects to productivity growth (Diewert and Morrison
1986)
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Micro-economic Analysis
Division
SNA Recommendations

For NIFA

. . . it is recommended that the purchasing power of
[net income from abroad] should be expressed in
terms of a broadly based numeraire, namely the set
of goods and services that make up gross final
domestic expenditure
SNA 1993 16.158
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Micro-economic Analysis
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SNA Recommendations

For the trading gain

There is a large but inconclusive literature [about selecting
which price index to use to deflate net exports], but one point
on which there is general agreement is that the choice of [that
index] can sometimes make a substantial difference in the
results. Thus the measurement of real [income] can sometimes
be sensitive to the choice of [the price index] and this has
prevented a consensus being reached on this issue.
SNA 1993 16.153
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Micro-economic Analysis
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The trading gain

Calculated by deflating net exports directly


Non-commodity flow, so no clear identification of
which deflator is best
Possible deflator choices include:




Export or import price indices
An average of export and import price indices
Final domestic demand price index
Consumer price index
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Micro-economic Analysis
Division
An preferable deflator?




A trading gain based on the final domestic demand
deflator encompasses many of the other options
Allows for a broader range of relative price
movements
Is readily accessible by users of national accounts
data
Is less sensitive to measurement issues stemming
from unit price indices
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Micro-economic Analysis
Division
Deflating the net export surplus

Follow Kohli (2006) and used the final domestic demand
deflator (FDD) to get ‘real’ GNI






 px 
 p 


v v 
1
gnit  vgdp 
gdpt
 (vx  vm )  T    x m 



p
2
p


 m
Ctg from changes in Net Export Share  FDD 

income produced
of GDP
Share of trade Terms of Trade Growth 
 (K, L, Productivity)
Salter Ratio Growth
in GDP


Salter Effect
Terms of Trade Effect


 vnifa nifat
Ctg from NIFA
1
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Tourquist index
Micro-economic Analysis
Division
Moving to ‘real’ GNI

Including changes in NIFA and the trading gain can change the perception
of how an economy performs relative to its neighbours over time

Particularly important during commodity booms

The next few slides illustrate this for Canada and the US

Begin by examining NIFA and the terms of trade

Move to a stacked bar graph that shows ‘real’ GNI growth by source

Illustrate how Canadian aggregates, such as imports, have responded

Conclude by demonstrating Canada’s ‘Reversal of Fortunes’
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Micro-economic Analysis
Division
Canada Vs. the US - NIFA
USA ($Billions)
Canada ($Billions)
0
90
-5
80
-10
70
60
-15
50
-20
40
-25
30
-30
20
-35
10
-40
0
1961 1964 1967
1970 1973 1976 1979
Canada
1982 1985 1988 1991
1994 1997 2000
2003 2006
USA
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Micro-economic Analysis
Division
Canada Vs. the US – Terms of Trade
Terms of Trade (2002 = 100)
Commodity Price Index
230
140
210
190
130
170
120
150
130
110
110
100
90
70
90
50
80
30
1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006
Canada
USA
BoC Commodity Price Index
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Micro-economic Analysis
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Canada – Real GNI by Source
% Growth
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
1961
1964
Real GDP
1967
1970
1973
1976
Salter Ratio
1979
1982
1985
1988
Terms of Trade
1991
1994
1997
NIFA
2000
2003
2006
Real GNI
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Micro-economic Analysis
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USA – Real GNI by Source
% Growth
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
1961
1964
Real GDP
1967
1970
1973
1976
Salter Ratio
1979
1982
1985
1988
Terms of Trade
1991
1994
1997
NIFA
2000
2003
2006
Real GNI
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Micro-economic Analysis
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Real exports are essentially unchanged
since 2000 while real imports rise quickly
Billions Chained $2002
640
590
540
490
440
390
340
1997
1998
1999
2000
Exports
2001
2002
2003
2004
2005
2006
Imports
2007
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Micro-economic Analysis
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Contributing to increased consumption
Consumption (Billions Chained $2002)
845
GDP/GNI (Billions Chained $2002)
1500
1400
795
1300
745
1200
695
1100
645
1000
595
900
545
1997
1999
1998
Real GDP
2000
2001
2003
2002
Real GNI
2004
2005
2007
2006
Real Consumption
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Micro-economic Analysis
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Real FDD outpaces real GDP due to NIFA
and Trading Gains
6
5
4
3
2
1
0
-1
-2
2002
Real GDP
2003
2004
Salter Ratio
2005
2006
2007
Terms of Trade
NIFA
FDD
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Micro-economic Analysis
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Including trading gains changes conclusions about
how the Canadian economy has fared against the
United States
Canada/US Index 1961=100
115
110
105
100
95
90
85
1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006
Labour Productivity
Real GDP per capita
Real GNI per capita
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Micro-economic Analysis
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Questions/Comments?
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