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Effects of Terms of Trade Gains and Tariff Changes on the Measurement of U.S. Productivity Growth Rob Feenstra, UC Davis Marshall Reinsdorf, BEA Matt Slaughter, Dartmouth 2008 World Congress on National Accounts and Economic Performance Measures for Nations Rosslyn, Virginia May 13, 2008 Motivation for Paper ▪ US productivity speedup of 1 percent per year starting in 1995, with ITC as key driver. ▪ Trading gains can look like productivity gains. ▪ Growth of imports may have price driver. ▪ Multilateral elimination of tariffs on ITC goods over 1997-1999 under the WTO Information Technology Agreement. ▪ Improvement in non-petroleum terms of trade coincided with the productivity speedup. www.bea.gov 2 Globalization of ITC Industry Table 1: International Trade in ICT Industries ($million) Industry 1992 1996 2000 Exports Imports Trade Balance Exports Imports Trade Balance 8,277 5,042 3,235 16,730 26,659 -9,929 10,422 6,927 3,495 27,550 54,590 -27,040 10,263 14,284 -4,022 34,686 75,514 -40,828 Semiconductors (End-use 21320) Exports Imports Trade Balance 11,527 15,477 -3,950 24,135 36,713 -12,579 45,118 48,341 -3,223 Telecommunications Equipment (End-use 214) Exports Imports Trade Balance Exports Imports Trade Balance 10,520 10,773 -253 47,054 57,952 -10,898 19,137 14,505 4,633 81,244 112,735 -31,491 28,987 38,203 -9,216 119,054 176,343 -57,289 Exports Imports Trade Balance 10.7 12.0 24.1 13.3 15.4 26.6 15.4 16.0 17.2 Computers (End-use 21300) Computer accessories (End-use 21301) Total (End-use 213+214) Share in Overall Trade (percent) www.bea.gov US Nonpetroleum Terms of Trade, MFP and Detrended MFP (1995=100) 120 115 110 105 100 Nonpetroleum terms of trade 95 MFP of Private Business Deviation of MFP from its post-1987 average 90 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 www.bea.gov Trade in GDP ▪ In current dollars, GDP = D + X – M, where D = C+I+G, “gross domestic purchases” or “domestic absorption.” ▪ Diewert and Morrison’s (1986) GDP function treats M as intermediate inputs and D and X as outputs. ▪ Can also think of GDP as consolidated Value Added for the whole economy in which the domestic intermediate inputs cancel out (but note that M is measured at tariff-free prices in calculating GDP.) www.bea.gov 5 Terms of Trade Effects can Resemble Productivity Effects Terms of Trade defined as PX/PM, where PGDP sDPD + sXPx – sMPM. ▪ Real income depends on production (GDP) and on gains from trade, which grow when terms of trade improve. ▪ Improved terms of trade raise nominal GDP and the real D attainable for a given current account balance, ceteris paribus. www.bea.gov 6 Change in Terms of Trade from PP to PP Reduces Real Consumption from D to D but Shift in Production from A to A has no Effect on Real GDP www.bea.gov 7 Theory of Productivity Measurement with International Trade The revenue function for the economy gives its gross value added at basic prices: M Rt(Pt, t, vt) max y t 0 i 1 pit q it N i 1 p txi x it N C i 1 j1 t p mij (1 ijt )mijt | y S ( v ) t t t where: Domestic final goods i = 1,…,M have quantities q it > 0 and prices p it > 0 t Exports i = 1,…,N have quantities x it > 0 and international prices p xi > 0. Imported intermediate inputs i = 1,…,N, in j = 1,…,C varieties indexed by country t t (1 ijt ) . Import quantities m ijt > 0, international prices p mij > 0, domestic prices p mij www.bea.gov Tariff Revenue in GDP GDP function differs from Rtby the amount of tariff revenue. N C t G (P , , v ) = R (P , , v ) p mij ijt m ijt , t t t t t t t t i 1 j1 Proposition 1 Holding fixed Pt and vt, the value of GDP is maximized at t = 0. www.bea.gov Figure 4: Tariff on an Imported Final Consumption Good y2 (import) P'1 P1 C U1 A A 0 G* R G y1 (export) www.bea.gov 10 Theoretical Measures of Productivity We define “true” productivity, as in Diewert and Morrison (1986): A t 1 R t ( P t 1 , t 1 , v t 1 ) t 1 t 1 t 1 t 1 , R (P , , v ) or R t (P t , t , v t ) A t 1 t t t . R (P , , v ) t These concepts of productivity change are not measurable because both the numerator of At-1 and the denominator of At are unobservable. Yet their geometric mean can be measured, once we assume a specific form for the revenue function. www.bea.gov Measure of True Productivity A t 1 A t 1/ 2 Rt ~ = t 1 / [PT( ~P t 1 , P t ,yt-1,yt) QT(vt-1, vt, wt-1, wt)] , R ~ where PT( P t 1 , ~P t ,yt-1,yt) is a Törnqvist price index over final goods, exports and imports, and QT(vt-1, vt, wt-1, wt)is a Törnqvist quantity index over primary factors. The Törnqvist price index is defined as: ~ ln PT( ~P t 1 , P t ,yt-1,yt) t 1 t 1 t t xi p xi x it p xi 1 p it 1q it 1 p it q it p it N 1 p xi ln ln t 1 t t 1 t 1 t t 1 R p i i 1 2 R R p xi i 1 2 R M t 1 t 1 t 1 t t t C t Cj1 p mij (1 ij ) m ij ~ p 1 j1 p mij (1 ij ) m ij mi ln . t 1 t t 1 ~ R R i 1 2 p mi N www.bea.gov Adjustment for Net Entry of Varieties from New Supplying Countries Our price indexes incorporate the effect of new (and also disappearing) countries that sell good i using Feenstra (1994), which shows that the ratio of CES price aggregates is: t t ~ p mi t 1,t mi t 1 = PmiG t 1 ~ mi p mi 1 /( i 1) , where the terms tmi < 1 equal one minus the share of period t expenditure of “new” suppling countries. As new supplying countries sell more, tmi falls. 1 We construct (tmh / tmh ) for each HS product h, raising to the power 1/(h – 1); then take the geometric mean across products h H i within an End-use industry i: tmi www.bea.gov hH i tmh t t 1 w mhi /( h 1) . / mh Conventional TFP – True Productivity ln TFP – ln A t t 1 A t 1/ 2 Gt G t 1 = ln t ln t 1 R R t 1 t 1 t t t t 1 t 1 t t 1 p xi xi p xi xi p xi xi p xi xi 1 p xi t 1, t ln ln PxiL + t 1 t t 1 t G t 1 2 2 R R p G i 1 xi N t 1 t 1 t 1 t t t C t Cj1 p mij (1 ij ) m ij ~ p 1 j1 p mij (1 ij ) m ij mi ln t 1 t t 1 ~ R R p i 1 2 mi N t 1 t 1 t t C Cj1 p mij m ij 1 j1 p mij m ij ln P t 1,t . miL G t 1 Gt i 1 2 N Gap between conventional and true TFP comprises: Difference between exact (Törnqvist) and Laspeyres formula for exports Difference between exact and Laspeyres formula for imports Correction for tariffs in the “true” import prices and weights Correction for net growth in import variety in the “true” import prices www.bea.gov Estimation of Influence of Unmeasured Gains from Trade on GDP/Productivity ▪ BEA aggregates Laspeyres indexes from BLS to find deflators for exports/imports in GDP. ▪ We calculate alternative versions of the indexes used by BEA to construct deflators. ▪ To aggregate our indexes, we use weights from the NIPAs and Fisher index formula. ▪ Removing nonmarket sectors of GDP leaves Value Added of Private Business, the output part of aggregate productivity calculation. www.bea.gov 15 Three Kinds of Corrections Tested ▪ ▪ ▪ Törnqvist rather than Laspeyres formula for deflators of trade components of GDP. Tariff-inclusive weights and index for M. Adjust PM for net entry of new countries supplying imports using CES formula. True detailed index = (linked index)( ) t t-1 1/(1) t = 1 – share of new supplying countries in period t www.bea.gov 16 Nonpetroleum terms of trade before If the improvement in the terms of trade understated, then productivity overstated. taking account ofisBEA’s use of isFisher Sources of mismeasurement: see Figure 2. Figure 2: Alternative Terms of Trade Indexes 120 115 110 105 100 Tornqvist w/ Tariff w/ Variety 7 1 19 99 0 7 19 99 0 1 19 98 0 7 19 98 0 1 19 97 0 7 19 97 0 1 19 96 0 7 19 96 0 1 19 95 0 7 19 95 0 1 19 94 0 7 19 94 0 1 19 19 93 0 7 Laspeyres 93 0 1 19 92 0 7 19 92 0 1 19 91 0 7 19 91 0 1 19 BLS www.bea.gov 90 0 7 90 0 19 89 0 19 19 89 0 1 95 www.bea.gov 96 19 01 96 19 03 96 19 05 96 19 07 96 19 09 96 19 11 97 19 01 97 19 03 97 19 05 97 19 07 97 19 09 97 19 11 98 19 01 98 19 03 98 19 05 98 19 07 98 19 09 98 19 11 99 19 01 99 19 03 99 19 05 99 19 07 99 19 09 99 11 19 Example of Detailed Indexes: Semiconductor Imports Figure 9: Import Prices, Semiconductors (21320) 100 90 80 70 60 50 40 BLS Laspeyres Tornqvist w/ Tariff w/ Variety 19 96 19 01 96 19 03 96 19 05 96 19 07 96 19 09 96 19 11 97 19 01 97 19 03 97 19 05 97 19 07 97 19 09 97 19 11 98 19 01 98 19 03 98 19 05 98 19 07 98 19 09 98 19 11 99 19 01 99 19 03 99 19 05 99 19 07 99 19 09 99 11 Example of Detailed Indexes: Semiconductor Exports Figure 10: Export Prices, Semiconductors (21320) 100 90 80 70 60 50 40 BLS www.bea.gov Laspeyres Tornqvist 96 19 01 96 19 03 96 19 05 96 19 07 96 19 09 96 19 11 97 19 01 97 19 03 97 19 05 97 19 07 97 19 09 97 19 11 98 19 01 98 19 03 98 19 05 98 19 07 98 19 09 98 19 11 99 19 01 99 19 03 99 19 05 99 19 07 99 19 09 99 11 19 Telecom Equipment Imports Figure 11: Import Prices, Telecommunications (21400) 100 95 90 85 80 75 BLS www.bea.gov Laspeyres Tornqvist w/ Tariff w/ Variety 19 96 19 01 96 19 03 96 19 05 96 19 07 96 19 09 96 19 11 97 19 01 97 19 03 97 19 05 97 19 07 97 19 09 97 19 11 98 19 01 98 19 03 98 19 05 98 19 07 98 19 09 98 19 11 99 19 01 99 19 03 99 19 05 99 19 07 99 19 09 99 11 Telecom Equipment Exports Figure 12: Export Prices, Telecommunications (21400) 105 100 95 90 85 80 BLS www.bea.gov Laspeyres Tornqvist Effects on Price Indexes (Averages for 1996-1999) Revision to Corrections Törnqvist formula Exports Index Imports Index Revision to Terms of Trade 0.6 %/year 0.2 %/year Add: Tariffinclusive prices 0.7 %/year 0.3 %/year Add: New import suppliers 1.5 %/year 1.1 %/year www.bea.gov 0.4 %/year Revision to Table 6: Effect of Lower-level Index Formula on Aggregate Fisher Price Indexes for Exports and Imports 1997 1998 1999 Ave 96-99 104.1 104.1 102.5 103.5 103.4 101.5 99.4 97.7 98.2 96.1 101.1 99.7 1994 1995 1996 I. Export Indexes Formula for lower-level aggregates Laspeyres Törnqvist 100 100 Growth rate difference of Törnqvist from Laspeyres Contribution of ICT goods to above difference -0.58 -0.10 -0.16 -0.18 -0.33 -0.23 -0.66 -0.41 -0.43 -0.27 -0.40 -0.27 103.2 101.6 102.8 100.9 102.6 100.5 102.6 99.8 99.0 97.6 97.3 95.7 95.1 93.2 92.8 90.3 93.5 91.0 90.4 87.5 97.3 95.7 95.3 93.3 -0.35 -0.55 -0.60 -0.01 -0.62 -0.60 -1.54 -0.78 -0.65 -0.82 -1.77 -0.59 -0.72 -0.87 -1.41 -0.56 -0.59 -0.69 -1.47 -0.57 II. Import Indexes Formula for lower-level aggregates Laspeyres Törnqvist Törnqvist, tariffs included in prices Törnqvist, adjusted for tariffs and varieties Growth rate difference from Laspeyres Törnqvist Törnqvist, tariffs included in prices Törnqvist, adjusted for tariffs and varieties Contribution of ICT goods to above difference www.bea.gov 100 100 100 100 -0.37 -0.48 -1.14 -0.33 23 Effects on Measures of GDP and Productivity ▪ Reduction in real GDP growth is about 0.1 percent per year after 1995 (allowing for lack of effect of capital goods & tariffs.) ▪ Growth rate of price index for private business value added increased by 0.2%/year. ▪ Growth of productivity reduced by almost 0.2 %/year, a fifth of the productivity speedup. www.bea.gov Price and Volume Indexes for GDP and Value Added of Private Business 1994 1995 1996 1997 1998 1999 Price index for GDP Official (rebased to 1994=100) After adjustment for Törnqvist formula, tariffs & variety Growth rate difference 100 102.0 104.0 105.7 106.9 108.4 100 102.1 104.1 106.0 107.3 108.9 0.01 0.10 0.13 0.13 0.12 Price Index for Private Business Value Added Official Laspeyres Törnqvist formula without tariffs Törnqvist formula with tariffs in prices and weights Törnqvist formula, with tariffs and variety adjustment 100 100 100 100 Difference from Laspeyres in annual growth rate Törnqvist Törnqvist, tariffs included in prices Törnqvist formula, with tariffs and variety adjustment Implied difference in growth rate of real output www.bea.gov 101.8 101.7 101.8 101.8 103.4 103.4 103.4 103.5 104.9 104.9 105.0 105.3 105.5 105.6 105.7 106.1 106.5 106.7 106.8 107.3 -0.01 0.03 0.05 0.02 0.06 0.01 0.07 0.06 0.06 0.09 0.02 0.16 0.19 0.19 0.16 0.01 -0.13 -0.20 -0.18 -0.15 25 End www.bea.gov