Feenstra-Reinsdorf-Slaughter-6-4-08
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Feenstra-Reinsdorf-Slaughter-6-4-08
Preliminary DRAFT; please do not quote without contacting the authorsEffects of Terms of Trade Gains and Tariff Changes on the Measurement of U.S. Pro Feenstra-Reinsdorf-Slaughter-6-4-08oductivity GrowthRobert c. FeenstraUniversity of California-Davis and NBERMarshall B. ReinsdorfU.S. Bureau of Economic AnalysisMatthew J. SlaughterTuck School of Business at Dartmouth and NBER39508AbảíLKỈSince 1995. growth in productivity in the United States has accelerated dramatically, due in lar Feenstra-Reinsdorf-Slaughter-6-4-08ge part to the information technology sector. In this paper we argue that part of the apparent speedup in productivity growth actually represents gainFeenstra-Reinsdorf-Slaughter-6-4-08
s in the terms of trade and tariff reductions, especially for high-tech products. Unmeasured gains in the terms of trade and declines in tariffs causePreliminary DRAFT; please do not quote without contacting the authorsEffects of Terms of Trade Gains and Tariff Changes on the Measurement of U.S. Pro Feenstra-Reinsdorf-Slaughter-6-4-08asuring these effects. The growth rates of our alternative price indexes for U.S. imports are as much as 2% per year lower than the growth rate of price indexes calculated using official methods. Because non-petroleum imports amount to around 10% of GDP during the late 1990s, the period we study, th Feenstra-Reinsdorf-Slaughter-6-4-08is terms-of-trade gain can account for close to 0.2 percentage points per year, or about 20% of the apparent increase in productivity growth for the UFeenstra-Reinsdorf-Slaughter-6-4-08
.S. economy. Deflators for domestic absorption are beyond the scope of the research in this paper, and it is possible that biases in the domestic pricPreliminary DRAFT; please do not quote without contacting the authorsEffects of Terms of Trade Gains and Tariff Changes on the Measurement of U.S. Pro Feenstra-Reinsdorf-Slaughter-6-4-08eful for Mike Harper’s assistance with the analysis of the productivity measurement Implications. We draw heavily upon Alterman, Diewert and Feenstra (1999), and the authors are indebted to Bill Alterman and Erwin Diewert for that earlier study which we apply here to U.S. productivity growth. For fi Feenstra-Reinsdorf-Slaughter-6-4-08nancial support Feenstra and Slaughter thank the National Science Foundation. Finally, the views expressed In this paper are those of the authors, notFeenstra-Reinsdorf-Slaughter-6-4-08
those of the Bureau of Economic Analysis.11. IntroductionSince 1995, growth in aggregate labor productivity in the United States appears to have accePreliminary DRAFT; please do not quote without contacting the authorsEffects of Terms of Trade Gains and Tariff Changes on the Measurement of U.S. Pro Feenstra-Reinsdorf-Slaughter-6-4-08on average at just 1.40 percent per year. From 1995 through 2007 this rale accelerated to an average of 2.55 percent per year.1 This speed-up in U.S. productivity growth would, if sustained, cany' dramatic implications for the U.S. economy. At the previous generation’s average annual growth rate of Feenstra-Reinsdorf-Slaughter-6-4-081.40 percent, average U.S. living standards were taking 50 years to double. Should the more-recent average annua) growth rate of 2.55 percent persist,Feenstra-Reinsdorf-Slaughter-6-4-08
then average U.S. living standards would take just 28 years to double - or a generation faster.What are the explanations for this improvement in prodPreliminary DRAFT; please do not quote without contacting the authorsEffects of Terms of Trade Gains and Tariff Changes on the Measurement of U.S. Pro Feenstra-Reinsdorf-Slaughter-6-4-08ith key direct and indirect roles in this productivity speedup. Jorgenson (2001, p. 2) argues that: "The accelerated information technology price decline signals faster productivity growth in IT-producing industries. In fact, these industries have been the source of most of aggregate productivity gr Feenstra-Reinsdorf-Slaughter-6-4-08owth throughout the 1990s."2 In this paper we advance a related, but new hypothesis: that1 These calculations are based on BLS data series SPRS8500609Feenstra-Reinsdorf-Slaughter-6-4-08
2, as repotted at uuu.bls.gov. Similar trends are evident in the BLS measures of multifactor productivity (MFP) for the private business sector, whichPreliminary DRAFT; please do not quote without contacting the authorsEffects of Terms of Trade Gains and Tariff Changes on the Measurement of U.S. Pro Feenstra-Reinsdorf-Slaughter-6-4-08ate that, “In accord with the ‘dual’ framework described above, we have interpreted the sharp decline in semiconductor prices after 1995 as signaling a pickup in that sector’s TFP growth." On the indirect role of IT in the productivity speedup, Jorgenson (2001, p. 22) finds that. "In response to the Feenstra-Reinsdorf-Slaughter-6-4-08se I IT] price changes, firms, households, and governments have accumulated computers, software, and communications equipment much more rapidly than oFeenstra-Reinsdorf-Slaughter-6-4-08
ther forms of capital.”2international trade, and in particular the increased globalization of the IT sector, accounts for an important part of the spePreliminary DRAFT; please do not quote without contacting the authorsEffects of Terms of Trade Gains and Tariff Changes on the Measurement of U.S. Pro Feenstra-Reinsdorf-Slaughter-6-4-08 dec lines that have been interpreted as total factor produc tivity (1FP). All important factor in tills piicc decline is that 11 has been the only industry to have a multilateral trade liberalization under the World Trade Organization. As we disc uss in sec tion 2, the Information Technology Agreem Feenstra-Reinsdorf-Slaughter-6-4-08ent (HA) was ratified in 1996 by dozens of countries accounting for nearly 95 percent of world IT trade, and the eliminated all world tariffs on hundrFeenstra-Reinsdorf-Slaughter-6-4-08
eds of IT products in four stages from early 1997 through 2000. Illis timing suggests that the H A may have played an important role in the post-1995 Preliminary DRAFT; please do not quote without contacting the authorsEffects of Terms of Trade Gains and Tariff Changes on the Measurement of U.S. Pro Feenstra-Reinsdorf-Slaughter-6-4-08ce index to the import price index) since 1989, together with mullifactor productivity from BLS. U.S. nonfarm multifactor productivity growth rose from 0.53 percent per year during 1987-1995 to 1.41 percent per year during 1996-2006. The overall terms of trade are heavily influenced by oil imports, Feenstra-Reinsdorf-Slaughter-6-4-08so to avoid that influence we use the overall export price divided by the lion-petroleum import price, both from the BLS. Ulis index of U.S. terms ofFeenstra-Reinsdorf-Slaughter-6-4-08
trade shows a declining trend up until 1995 in Figure 1. Since 1995 - at precisely the lime that productivity growth picked up its behavior changed, wPreliminary DRAFT; please do not quote without contacting the authorsEffects of Terms of Trade Gains and Tariff Changes on the Measurement of U.S. Pro Feenstra-Reinsdorf-Slaughter-6-4-08 of trade from 1995 Io 2007 is 1.0 percent, so the cumulative gain was nearly as large as the deterioration in terms of trade from the petroleum price shocks in 1973-74 and 1979-80, whic h totaled around 15%.3See also Mann (2003), who expresses a similar viewpoint.3The BLS uses a Laspeyres formula 1 Feenstra-Reinsdorf-Slaughter-6-4-080 construct price indexes for imports and exports based on price quotes it collects from importing and exporting firms. We have this price data for SeFeenstra-Reinsdorf-Slaughter-6-4-08
ptember 1993 through December 1999, so we are able to reconstruct the Laspeyres price indexes of BLS for that time period. The ratio of our Laspeyres Preliminary DRAFT; please do not quote without contacting the authorsEffects of Terms of Trade Gains and Tariff Changes on the Measurement of U.S. Pro Feenstra-Reinsdorf-Slaughter-6-4-08tch the one constructed from published BLS indexes due to missing data for some industries, but the difference is immaterial.The finding that the U.S. terms of trade began to improve at precisely the time of the productivity speedup, as shown in Figure 1, suggests that there could be some connection Feenstra-Reinsdorf-Slaughter-6-4-08 between the two. Yet there are strong theoretical reasons to think that changes in the terms of trade have no effect on productivity growth. Kehoe anFeenstra-Reinsdorf-Slaughter-6-4-08
d Ruhl (2007) have recently argued that changes in the terms of trade have no impact on productivity when tariffs are zero. When tariffs are present bPreliminary DRAFT; please do not quote without contacting the authorsEffects of Terms of Trade Gains and Tariff Changes on the Measurement of U.S. Pro Feenstra-Reinsdorf-Slaughter-6-4-08l (2007) from a one-sector to a multi-sector model and also consider tariff reductions. We show that tariff reductions and changes in the terms of trade have only a second-order impact on GDP and productivity.If the terms of trade are mismeasured, however, the story is different. Unmeasured changes Feenstra-Reinsdorf-Slaughter-6-4-08in the terms of trade have a first-order impact on reported productivity growth. In particular, if the reduction in import prices is understated, prodFeenstra-Reinsdorf-Slaughter-6-4-08
uctivity growth will be correspondingly overstated. There are three reasons to expect that the U.S. terms of trade are mismeasured: (i) as already notPreliminary DRAFT; please do not quote without contacting the authorsEffects of Terms of Trade Gains and Tariff Changes on the Measurement of U.S. Pro Feenstra-Reinsdorf-Slaughter-6-4-08, imports exclude duties, and the BLS import indexes—which the Bureau of Economic Analysis (BEA)https://khothuvien.cori!4uses to deflate imports—also measure import prices free of tariffs; (iii) the BLS import price index does not account for increases in the variety of imports coming from new suppl Feenstra-Reinsdorf-Slaughter-6-4-08ying countries, as analyzed by Feenstra (1994) and Broda and Weinstein (2006). In section 4 we construct price indexes that correct for these three feFeenstra-Reinsdorf-Slaughter-6-4-08
atures, and in section 5 we analyze the impact of the ITA on the prices and variety of high-technology products. We find that high-tech products are mGọi ngay
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