Are Shocks to the Terms of Trade Shocks to Productivity?

Timothy J. Kehoe () and Kim Ruhl ()

No 13111, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: International trade is frequently thought of as a production technology in which the inputs are exports and the outputs are imports. Exports are transformed into imports at the rate of the price of exports relative to the price of imports: the reciprocal of the terms of trade. Cast this way, a change in the terms of trade acts as a productivity shock. Or does it? In this paper, we show that this line of reasoning cannot work in standard models. Starting with a simple model and then generalizing, we show that changes in the terms of trade have no first-order effect on productivity when output is measured as chain-weighted real gross domestic product. The terms of trade do affect real income and consumption in a country, and we show how measures of real income change with the terms of trade at business cycle frequencies and during financial crises.

JEL-codes: E23 F41 F43 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-int and nep-mac
Date: 2007-05
Note: EFG
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Related works:
Working Paper: Are shocks to the terms of trade shocks to productivity? (2007)
Journal Article: Are Shocks to the Terms of Trade Shocks to Productivity? (2008)
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