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Effects of Terms of Trade & Tariff Changes on the Measurement of U.S. Productivity Growth by Robert C. Feenstra, Univ. of California-Davis & NBER, Marshall B. Reinsdorf, Bureau of Economic Analysis, Mathew J. Slaughter, Tuck School of Business, Dartmouth College & NBER, and Michael Harper, Bureau of Labor Statistics, all USA Barbara M. Fraumeni Muskie School of Public Service, University of Southern Maine & the National Bureau of Economic Research (NBER), USA IARIW, Session 3 Joensuu, Finland August 22, 2006 Muskie School of Public Service Ph.D. Program in Public Policy MISMEASUREMENT OF Import & export prices The impact of tariff reductions & currency devaluations The import effect on input and output prices LEADS TO INCORRECT ESTIMATES OF PRODUCTIVITY CHANGE Muskie School of Public Service Ph.D. Program in Public Policy Second Half of the 90’s New economy Globalization of IT industry in the US Key IT industries: Computers, peripherals, semiconductors & telecommunications equipment, are running trade deficits Import & export share about 15% of the import & export totals for the U.S. Tariff reductions (to zero) on a wide range of IT products Currency depreciation after Asian crisis Muskie School of Public Service Ph.D. Program in Public Policy Import & Export Prices Indexes BLS constructs Laspeyres indexes This paper’s Tornqvist index lies below Laspeyres Expected for net of tariff import index For exports, due to substitution along foreign demand curves For IT industries, differences between these two indexes show up in the 2nd half of the 90’s Muskie School of Public Service Ph.D. Program in Public Policy Import Price Regressions Independent variables in fixed effect equation Indicator of tariff reduction (ITA) stages Tornqvist index of real exchange rates with lags Export or domestic price index 3 variations in industry coverage depending upon % covered by ITA 100% 50-99% 1-49% 2 control group regressions For manufacturing industries only For agricultural industries only when domestic price is included Muskie School of Public Service Ph.D. Program in Public Policy Regression Results In the version with domestic prices (particularly with 100% ITA coverage), the passthrough coefficient indicates a highly magnified impact on lowering import prices Exchange rate and export or domestic price coefficients also significant in all versions Simulated prices, with no tariff or exchange rate reductions, show that the ITA effect is about = to the Laspeyres vs.Tornqvist formula bias Muskie School of Public Service Ph.D. Program in Public Policy Turning to Productivity Measurement Define a revenue function with intermediate inputs gross of tariffs, but industry gross output net of tariffs Authors show that eliminating tariffs with INCORRECT/CURRENT measurement Increases US GDP rate of growth Increases MFP rate of growth See Figure 7 Muskie School of Public Service Ph.D. Program in Public Policy Figure 7 Initially at y0 (tangency A0 and PPF, including tariff on good 1) Nominal GDP at B0 at y0 excluding tariffs with initial welfare at Q0 After tariff elimination producers line A1 has same slope as B0 (tangency at y1), thus welfare increases to Q1 But there is no shift on PPF, therefore no change in MFP GDP measures the slope of the indifference curve, which should not be used to estimate productivity change Muskie School of Public Service Ph.D. Program in Public Policy MFP Is Conflating True Productivity Changes with International Trade Changes Figure 7 result Also existing international trade measures are biased BLS use of Laspeyres export & import price measures Upward bias on MFP growth 1996-9 .1 to .12 depending upon variant (BLS) Very small effect with NIPA price indexes because upper level substitution bias is avoided Muskie School of Public Service Ph.D. Program in Public Policy Effect of Measuring Imports Gross of Tariffs Import share too large Falling tariffs reduce import prices On net, from tariff effect, MFP overestimated by the same as the international trade effect without tariffs: .12 Muskie School of Public Service Ph.D. Program in Public Policy Capital Input Effects A corrected capital stock estimated with Tornqvist capital good import prices would have a higher growth rate than one with a Laspeyres index Accordingly, MFP is too high by .038% per year for 1995-2002 Shortcut method of treating investment as an intermediate input would bias MFP upwards by .07% per year Muskie School of Public Service Ph.D. Program in Public Policy Conclusions Don’t ignore international trade effects Both terms of trade (prices) and tariffs are important Biases come from both the output and input side Use of Laspeyre indexes creates biases in estimates Muskie School of Public Service Ph.D. Program in Public Policy Comments Paper is chock full of useful and thoughtprovoking results Difficult to find much to criticize Only very minor issues – a better summary & Argument for domestic price in import price regressions seem stronger than for an export price Globalization: Is 2000 a poor ending year to use? Not true for a K stock aggregate that the K stock rates of growth and the CSF growth rates will be the same as weights will differ