Adjusting Output and Productivity Indexes for Changes in the Terms of Trade

Abstract

In this paper we employ index number theory in addressing the problem of adjusting real national income and real domestic product for changes in a country's terms of trade. More specifically, using recent developments in the theory of production, we address the problems related to measuring: Ci) real output produced and real input utilized by the private business sector; (ii) productivity growth or technical change; (iii) the effects on domestic real output of changes in the terms of trade; and (iv) the impact on final sales to domestic purchasers of changes in the balance of payments deficit, in a consistent accounting framework. This treatment of international trade allows us to undertake comparative statics analyses using only production theory, whereas in the traditional paradigm which treats traded goods as perfectly substitutable with a class of domestic goods, a general equilibrium framework is required. We illustrate our suggested solutions using U.S. data for the years 1968-82.

Distributing the Gains from Waterfront Productivity Improvements

“…Assuming competitive maximising behaviour and constant returns to scale, we have p · y − rk = 0, or p · y = rk = π, and we can solve for r which gives us the ex post gross rate of return on capital. Following Diewert and Morrison (1986), we define the following total capital productivity index to capture the effect on the firm of a change in productivity between periods t − 1 and t:…”

“…This translog profit function is 'flexible' in the sense that it can approximate an arbitrary, twice continuously differentiable function to the second order (Diewert 1974, p. 113). Diewert and Morrison (1986) and Fox and Kohli (1998) exploited the translog identity of Caves et al (1982) to prove a relationship between the translog functional form and the Törnqvist (1936) index formula, which they suggested for decomposing the growth in domestic product for a trading economy. Lawrence et al (2001) show that if the functional form for a firm's profit function, π, is translog as defined by Equation (3) in periods t − 1 and t, and there is competitive profit maximising behaviour in both periods, then the productivity index in Equation (2) is exactly equal to a Törnqvist implicit net output quantity index divided by the capital stock growth between periods t − 1 and t.…”

Profit and Price Effects of Multi-species Individual Transferable Quotas

“…The starting point is an index number profit decomposition method developed in Fox et al (2003) and applied in that paper solely to an ex post evaluation of a single-species fishery. The technique is an application of the Törnqvist (1936) index that takes advantage of its multiplicative property (Diewert and Morrison, 1986;Kohli, 1990) to allow for changes in profitability to be decomposed into the contributions from individual components of operations. Because of the single-species nature of the fishery studied in Fox et al (2003), these components are only factor inputs (labour, fuel, capital, and fish stock).…”

Accounting for Recent Economic Growth in Southeast Asia

“…This is rather suprising, since the openness of these countries is often mentioned as one of their important characteristics. 3 Moreover, as noted by Diewert and Morrison (1986), an improvement in the terms of trade is similar to a technological advance: it makes it possible for a country to increase its net output for any given amount of domestic inputs. A deterioration, on the other hand, is equivalent to technological regress, and it reduces the net amount of goods that a country obtains for a given effort.…”

“…The approach we use relies on an index number technique, and it has a strong theoretical foundation, being derived from the GNP/GDP function approach to modeling the production sector of an open economy; see Kohli ( , 1991 and Woodland (1982). This technique, introduced by , builds on the pioneering work of Diewert and Morrison (1986) who examined the welfare effects of technological change and terms-of-trade shifts.…”