Terms of trade, real GDP, and real value added: A new look at New Zealand's growth performance

Abstract

The conventional measure of real GDP underestimates the growth in real value added when the terms of trade improve. Thus, in New Zealand, where the terms of trade have been improving over the past 15 years, real GDP has underestimated the country's real growth performance by nearly 0.4% per year on average. Our analysis has a solid theoretical foundation, being based on the GDP‐function approach to modelling the production sector of an open economy.

Notes

Chief Economist, Swiss National Bank, P.O. Box 2800, CH‐8022 Zurich, Switzerland. Phone: +4I‐I‐63I‐3233/34; fax: +41–1‐631–3188; e‐mail: [email protected]; home page: www.unige.ch/ses/ecopo/kohli/kohli.html. An earlier version of this paper was presented at the New Zealand Treasury in Wellington on March 31, 2003, and I am grateful to the participants to this seminar for their comments and suggestions. I also wish to thank Michael Oliver of Statistics New Zealand for his help with the data, and Kevin J. Fox, Mary Louise O'Dowd, Nick Oulton, Jo Paisley, as well as the editor and two referees for their comments on an earlier draft. They are obviously not responsible for any errors or omissions.