Total factor productivity and the terms of trade

Jan Teresiński

No 6/2019, IWH-CompNet Discussion Papers from Halle Institute for Economic Research (IWH)

Abstract: In this paper we analyse how the terms of trade (TOT) - the ratio of export prices to import prices - affect total factor productivity (TFP). We provide empirical macroeconomic evidence for the European Union countries based on the times series SVAR analysis and microeconomic evidence based on industry level data from the Competitiveness Research Network (CompNet) database which shows that the terms of trade improvements are associated with a slowdown in the total factor productivity growth. Next, we build a theoretical model which combines open economy framework with the endogenous growth theory. In the model the terms of trade improvements increase demand for labour employed in exportable goods production at the expense of technology production (research and development - R&D) which leads to a shift of resources from knowledge development towards physical exportable goods. This reallocation has a negative impact on the TFP growth. Under a plausible calibration the model is able to replicate the observed empirical pattern.

Keywords: total factor productivity; terms of trade; R&D (search for similar items in EconPapers)
JEL-codes: F41 O32 O41 O47 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-eff, nep-gro and nep-int
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:iwhcom:62019

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