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GDP is a measure of output, not welfare: or, HOS meets the SNA

Oulton, Nicholas (2019) GDP is a measure of output, not welfare: or, HOS meets the SNA. CFM discussion paper series (CFM-DP2019-06). Centre For Macroeconomics, London School of Economics and Political Science, London, UK.

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Abstract

What effect, if any, do changes in the terms of trade have on the level of output (GDP) or welfare? I examine this issue through two versions of a textbook, Hecksher-Ohlin-Samuelson (HOS), two-good model of a small, open economy. In the first version both goods are for final consumption. In the second, one good is an imported intermediate input into the other. In both versions, economic theory suggests that an improvement in the terms of trade raises welfare (consumption) but leaves aggregate output (GDP) unchanged. This follows from a continuous-time analysis using Divisia index numbers. I then show that a national income accountant applying the principles of the 2008 System of National Accounts (SNA) would reach the same conclusions.

Item Type: Monograph (Discussion Paper)
Official URL: http://www.centreformacroeconomics.ac.uk/Home.aspx
Additional Information: © The Author
Divisions: Centre for Macroeconomics
Subjects: H Social Sciences > HB Economic Theory
JEL classification: E - Macroeconomics and Monetary Economics > E0 - General > E01 - Measurement and Data on National Income and Product Accounts and Wealth
F - International Economics > F1 - Trade > F11 - Neoclassical Models of Trade
C - Mathematical and Quantitative Methods > C4 - Econometric and Statistical Methods: Special Topics > C43 - Index Numbers and Aggregation
D - Microeconomics > D6 - Welfare Economics > D60 - General
Date Deposited: 04 Jun 2019 14:36
Last Modified: 13 Dec 2019 00:55
URI: http://eprints.lse.ac.uk/id/eprint/100945

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