Effects of Terms of Trade Gains and Tariff Changes on the Measurement of U.S. Productivity Growth

52 Pages Posted: 22 Dec 2009 Last revised: 10 Aug 2010

See all articles by Robert C. Feenstra

Robert C. Feenstra

University of California, Davis - Department of Economics; National Bureau of Economic Research (NBER)

Benjamin R. Mandel

Federal Reserve Bank of New York

Marshall B. Reinsdorf

U.S. Department of Commerce - Bureau of Economic Analysis (BEA)

Matthew J. Slaughter

Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER)

Date Written: December 2009

Abstract

Since 1995, growth in productivity in the United States appears to have accelerated dramatically. In this paper, we argue that part of this apparent speed-up actually represents gains in the terms of trade and tariff reductions, especially for information-technology products. We demonstrate how unmeasured gains in the terms of trade and declines in tariffs can cause conventionally measured growth in real output and productivity to be overstated. Building on the GDP function approach of Diewert and Morrison, we develop methods for measuring these effects. From 1995 through 2006, the average growth rates of our alternative price indexes for U.S. imports are 1.5% per year lower than the growth rate of price indexes calculated using official methods. Thus properly measured terms-of-trade gain can account for close to 0.2 percentage points per year, or about 20%, of the 1995-2006 apparent increase in productivity growth for the U.S. economy. Bias in the price indexes used to deflate domestic output is a question beyond the scope of this paper, but if upward bias were also present in those indexes, this could offset some of the effects of mismeasurement of gains in terms of trade.

Suggested Citation

Feenstra, Robert C. and Mandel, Benjamin R. and Reinsdorf, Marshall B. and Slaughter, Matthew J., Effects of Terms of Trade Gains and Tariff Changes on the Measurement of U.S. Productivity Growth (December 2009). NBER Working Paper No. w15592. Available at SSRN: https://ssrn.com/abstract=1525770

Robert C. Feenstra (Contact Author)

University of California, Davis - Department of Economics ( email )

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Benjamin R. Mandel

Federal Reserve Bank of New York ( email )

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Marshall B. Reinsdorf

U.S. Department of Commerce - Bureau of Economic Analysis (BEA) ( email )

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Matthew J. Slaughter

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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