New Measures of Prices and Productivity for Tradable and Nontradable Goods*

Abstract

Empirical work on the division of real output and prices into tradable and nontradable components has not kept pace with theoretical developments. The conventional proxies of prices and productivity by tradable and nontradable sector are examined and found deficient in several important respects. It is demonstrated that an approach that relies on the long–standing data on gross domestic product by industry of origin can overcome some of these deficiencies. These data are used to construct new annual measures of prices and productivity for tradable and nontradable output for 12 industrial countries over the period 1950–73. While far from precise, the new measures are consistent with the following criteria for distinguishing between tradables and nontradables: the degree of foreign trade participation should be higher for tradables than for nontradables; the degree of international commodity arbitrage, as measured by cross‐country correlations of price changes, should be higher for tradables than nontradables; and tradables should be closer substitutes than nontradables for traded goods from other countries (imports). Despite the considerable conceptual advantages of the new measures of prices and productivity over the conventional proxies, correlation analysis indicates that the new and old measures usually move together rather closely in our 12 subject countries. The correlations are higher across the alternative relative productivity measures than for the alternative relative price measures.

Tradable and nontradable inflation indexes: replicating New Zealand’s tradable indexes with BLS CPI data

“…For example, Goldstein and Officer (1979) take GDP by industry of origin. Then, using a priori judgement, industries are assigned to the tradable and non-tradable sectors.…”

“…Goldstein and Officer (1979) have shown that the conventional proxies of output and prices data for the tradable and non-tradable sectors are deficient in several important respects. In the Australian empirical literature there has been little detailed analysis of what constitutes the tradable sector.…”

Trade liberalisation, competitiveness and the real exchange rate (RER): An analysis of developments in South Africa during the 1990s

“…One such approach relies on a-priori assumptions about sectors. For example, Goldstein and Officer (1979) suggest that since exports and imports dominate in the agriculture, mining and manufacturing sectors; these sectors could be regarded as tradable sectors. This distinction was used in a study for Australia (Shann, 1982 cited in Knight & Johnson, 1997), Mauritius (Milner & McKay, 1996) and South Africa (Holden, 1988).…”

“…GEAR is aimed at "…strengthening the competitive capacity of the economy in the long term" (Government of South Africa, 1996: 7). Further; competitiveness in the tradable goods sector is to be achieved through: "a reduction in tariffs to contain input prices" (ibid., 1996: 4) 15 . Government policy is thus premised on the assumption that exports are vital for economic growth.…”

“…14 Complexity was due to a variety of different tariff rates and exemptions granted on a firm-by-firm basis rather than a product-by-product basis. 15 It is interesting to note that the objective of striving for international competitiveness is not meant to be isolated from social objectives. In fact one of the stated intentions of economic policy is "to support a competitive and more labour-intensive growth path" (GEAR, 1996: 7).…”