2008 World Congress on National Accounts and Economic Performance Measures for Nations, Washington DC/USA, May 12-17, 2008 Globalization, Trade in Middle

2008 World Congress on National Accounts andEconomic Performance Measures for Nations,Washington DC/USA, May 12-17, 2008

Globalization, Trade in Middle Products, and Relative Prices

Ulrich KohliAlternate Member of the Governing

BoardSwiss National Bank

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Three important developments thought to be linked to globalization:

• the falling labor share in GDP (from about 66% in 1970 to 61% 2005)

• the increase in openness (from about 5% in 1970 to 13% in 2005)

• the increase in the trade deficit (from close to zero in 1990 to 6% in 2005)

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Figure 1

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Figure 2

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Figure 3

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Conventional analytical framework:

• labor share: production theory (factor endowments, technological change, …)

• openness: consumer theory, macro theory (relative prices, income, …)

• trade balance: consumer theory, macro theory (income, real exchange rate, …)

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Shortcomings of the Fleming-Mundell model:

• exports are demand determined (Keynesian view)

• only two goods in the model: hence, there is no difference between the terms of trade and the real exchange rate

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Shortcomings of the Heckscher-Ohlin model:

• only two goods (no role for the real exchange rate)

• all trade in end products

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In the small open economy:• exports are supply determined →

production theoryAll trade is in middle products• import decisions made by firms →

production theoryThus, the proper setting to analyze openness andtrade deficits is production theory

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Real GDP vs. real GDI• if trade takes place in middle products, then

trade takes place during production• changes in the terms of trade and in the real

exchange rate impact on real value added• these are similar to a technological change

Hence real GDI is the appropriate measure of real value added

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The changes in all three shares can be explained by changes in:

• the terms of trade• the real exchange rate• relative factor endowments • technology

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The model:• two factors: labor (L) and capital (K)• two middle products: imports (M) and

exports (X)• one final, nontraded good (N)

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Figure 4

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Figure 5

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Three-Good Production Possibilities Surfacefor Alternative Domestic Factor Endowments

Figure 6

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Figure 7

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Table 2Cumulated effects of changes in

the terms of trade, the real exchange rate, capital intensity, and technology on

openness, the trade balance and the labour share1970–2005

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The increase in openness is due foremost to technological change

The increase in capital intensity, the deterioration in the terms of trade and the real appreciation of the currency worked in the opposite direction

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1. the worsening of the terms of trade2. the increase in capital intensity3. the real appreciation of the currency

Technological change contained the deterioration

The deterioration of the trade balance is due to (in the order of importance):

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1. the worsening of the terms of trade2. technological change3. the real appreciation of the currency

The increase in capital intensity contained the fall

The fall in the labor share is due to (in the order of importance):

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Figure 8

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Conclusions: Recognizing that trade is in middle products has

far reaching consequences for the measurement of real value added and productivity, and for the modeling of international trade

Technological change has been a major force in the changes that have taken place in recent decades, be it in terms of openness, trade imbalances, or income distribution

The observed increase in the average productivity of labor has been largely driven by the growth in TFP

A large increase in the relative price of traded goods and/or a significant improvement in the terms of trade are required to reduce the U.S. trade deficit

Documents

2008 World Congress on National Accounts and Economic Performance Measures for Nations, Washington DC/USA, May 12-17, 2008 Globalization, Trade in Middle