TY  - JOUR
AU  - Kehoe,Timothy J.
AU  - Ruhl,Kim J.
TI  - Are Shocks to the Terms of Trade Shocks to Productivity?
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13111
PY  - 2007
Y2  - May 2007
UR  - http://www.nber.org/papers/w13111
L1  - http://www.nber.org/papers/w13111.pdf
N1  - Author contact info:
Timothy J. Kehoe
University of Minnesota
Department of Economics
1925 Fourth Street South
Minneapolis, MN 55455-0462
Tel: 612/625-1589
Fax: 612/204-5515
E-Mail: tkehoe@umn.edu

Kim J. Ruhl
NYU Stern School of Business
Department of Economics
44 West Fourth Street, Suite 7-86
New York, NY 10012-1126
E-Mail: kruhl@stern.nyu.edu
AB  - International trade is frequently thought of as a production technology in which the inputs are  exports and the outputs are imports.  Exports are transformed into imports at the rate of the price of exports relative to the price of imports: the reciprocal of the terms of trade.  Cast this way, a change in the terms of trade acts as a productivity shock.  Or does it?  In this paper, we show that this line of reasoning cannot work in standard models.  Starting with a simple model and then generalizing, we show that changes in the terms of trade have no first-order effect on productivity when output is measured as chain-weighted real gross domestic product.  The terms of trade do affect real income and consumption in a country, and we show how measures of real income change with the terms of trade at business cycle frequencies and during financial crises.

ER  -