Research Agenda: PPPs for Exports and Imports

PPPs for Exports and Imports

In the ICP, foreign trade sector is traditionally incorporated using simple exchange rates. However, there has been a rich literature on incorporating terms-of-trade gains and losses due to the export-import price differentials into international comparisons. It is obvious that the terms-of-trade effect can be very significant in measuring GDI (gross domestic income) growth, given wide swings in oil and other raw material prices. Put simply, an improvement in the terms of trade means a country gets more for less. In the SNA, a change in the terms-of-trade is treated as a price effect, rather than a real effect, hence the terms of trade are not captured by the real GDP measure. Thus, using the terms-of-trade adjustment should improve quality of extrapolation, and help bridge the gap between ICP benchmarks.

Moreover, the terms of trade considerations can be important in comparing GDP across space as well. Even when approximating PPPs for exports and imports by the exchange rate, implicitly assuming that the law of one price holds for tradables, the computed effect can reach 10% of GDP.  Some researchers compute much larger effects when using unit value ratios for exports and imports. However, the computation results could become susceptible to the quality of information on foreign trade transactions, and data gaps could become wide outside the OECD area.  

Given the importance of this topic for the extrapolation, as well as productivity comparisons the following is identified for further research:

  • Investigate data availability and reliability for the terms-of-trade computation, both across space and across time;
  • Evaluate various methodologies to incorporate the term-of trade effect into the real GDP and PPP computation, on an experimental basis; and
  • Incorporate the terms-of-trade effects into the 2005, 2011 and 2017 ICP results, on an experimental basis.