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

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Presentation on theme: "Micro-economic Analysis Division ‘Real’ Income, Terms of Trade and Economic Performance Ryan Macdonald Micro-economic Analysis Division Statistics Canada."— Presentation transcript:

1 Micro-economic Analysis Division ‘Real’ Income, Terms of Trade and Economic Performance Ryan Macdonald Micro-economic Analysis Division Statistics Canada 15 May 2008

2 Micro-economic Analysis Division 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 Micro-economic Analysis Division 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 Micro-economic Analysis Division 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

5 Micro-economic Analysis Division 5 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

6 Micro-economic Analysis Division 6 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

7 Micro-economic Analysis Division 7 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

8 Micro-economic Analysis Division 8 Deflating the net export surplus  Follow Kohli (2006) and used the final domestic demand deflator (FDD) to get ‘real’ GNI Tourquist index 1

9 Micro-economic Analysis Division 9 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’

10 Micro-economic Analysis Division 10 Canada Vs. the US - NIFA

11 Micro-economic Analysis Division 11 Canada Vs. the US – Terms of Trade

12 Micro-economic Analysis Division 12 Canada – Real GNI by Source

13 Micro-economic Analysis Division 13 USA – Real GNI by Source

14 Micro-economic Analysis Division 14 Real exports are essentially unchanged since 2000 while real imports rise quickly

15 Micro-economic Analysis Division 15 Contributing to increased consumption

16 Micro-economic Analysis Division 16 Real FDD outpaces real GDP due to NIFA and Trading Gains

17 Micro-economic Analysis Division 17 Including trading gains changes conclusions about how the Canadian economy has fared against the United States

18 Micro-economic Analysis Division 18 Questions/Comments?


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