Micro-economic Analysis Division ‘Real’ Income, Terms of Trade and Economic Performance Ryan Macdonald Micro-economic Analysis Division Statistics Canada

Micro-economic Analysis Division


‘Real’ Income, Terms of Trade and Economic Performance

Ryan MacdonaldMicro-economic Analysis DivisionStatistics Canada15 May 2008

2



‘Real’ income measurement

Measuring ‘real’ income has concerned economists and national accountants for many years

Two aspects of real income are dealt with in the 1993 System of National Accounts Net income from abroad Trading gain

3



Real’ income measurement

Extensive literature See for example (Geary 1961, Stuvel 1959, Nicholson 1960,

Courbis 1969, Kubayashi 1971, Dennison 1981, Silver and Mahdavy 1989 , SNA 1993, Kohli 2006)

Important terms to include for ‘real’ income measurement, particularly the trading gain Driven by terms of trade shifts in most cases Similar effects to productivity growth (Diewert and Morrison

1986)

4



SNA Recommendations

For NIFA . . . it is recommended that the purchasing power of

[net income from abroad] should be expressed in terms of a broadly based numeraire, namely the set of goods and services that make up gross final domestic expenditure

SNA 1993 16.158

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SNA Recommendations

For the trading gain There is a large but inconclusive literature [about selecting

which price index to use to deflate net exports], but one point on which there is general agreement is that the choice of [that index] can sometimes make a substantial difference in the results. Thus the measurement of real [income] can sometimes be sensitive to the choice of [the price index] and this has prevented a consensus being reached on this issue.

SNA 1993 16.153

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The trading gain

Calculated by deflating net exports directly Non-commodity flow, so no clear identification of

which deflator is best Possible deflator choices include:

Export or import price indices An average of export and import price indices Final domestic demand price index Consumer price index

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An preferable deflator?

A trading gain based on the final domestic demand deflator encompasses many of the other options

Allows for a broader range of relative price movements

Is readily accessible by users of national accounts data

Is less sensitive to measurement issues stemming from unit price indices

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Deflating the net export surplus

Follow Kohli (2006) and used the final domestic demand deflator (FDD) to get ‘real’ GNI

1

Ctg from changes in Net Export Share income produced of GDP Share oSalter Ratio Growth (K, L, Productivity)

Salter Effect

( )2

x mTt gdp t x m

FDD

v vpgni v gdp v v

p

f trade Terms of Trade Growth in GDP

Terms of Trade Effect

x

m

p

p

Tourquist index1

Ctg from NIFA

nifa tv nifa

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Moving to ‘real’ GNI Including changes in NIFA and the trading gain can change the

perception of how an economy performs relative to its neighbours over time

Particularly important during commodity booms

The next few slides illustrate this for Canada and the US Begin by examining NIFA and the terms of trade Move to a stacked bar graph that shows ‘real’ GNI growth by source Illustrate how Canadian aggregates, such as imports, have responded Conclude by demonstrating Canada’s ‘Reversal of Fortunes’

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Canada Vs. the US - NIFA

-40

-35

-30

-25

-20

-15

-10

-5

0

1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006

0

10

20

30

40

50

60

70

80

90

Canada USA

Canada ($Billions) USA ($Billions)

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Canada Vs. the US – Terms of Trade

80

90

100

110

120

130

140

1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006

30

50

70

90

110

130

150

170

190

210

230

Canada USA BoC Commodity Price Index

Terms of Trade (2002 = 100) Commodity Price Index

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Canada – Real GNI by Source

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006

Real GDP Salter Ratio Terms of Trade NIFA Real GNI

% Growth

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USA – Real GNI by Source

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006

Real GDP Salter Ratio Terms of Trade NIFA Real GNI

% Growth

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Real exports are essentially unchanged since 2000 while real imports rise quickly

340

390

440

490

540

590

640

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007Exports Imports

Billions Chained $2002

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Contributing to increased consumption

900

1000

1100

1200

1300

1400

1500

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

545

595

645

695

745

795

845

Real GDP Real GNI Real Consumption

GDP/GNI (Billions Chained $2002) Consumption (Billions Chained $2002)

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Real FDD outpaces real GDP due to NIFA and Trading Gains

-2

-1

0

1

2

3

4

5

6

2002 2003 2004 2005 2006 2007Real GDP Salter Ratio Terms of Trade NIFA FDD

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Including trading gains changes conclusions about how the Canadian economy has fared against the United States

85

90

95

100

105

110

115

1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006

Labour Productivity Real GDP per capita Real GNI per capita

Canada/US Index 1961=100

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Micro-economic Analysis Division ‘Real’ Income, Terms of Trade and Economic Performance Ryan Macdonald Micro-economic Analysis Division Statistics Canada