GAUGING ECONOMIC PERFORMANCE UNDER CHANGING TERMS OF TRADE: REAL GROSS DOMESTIC INCOME OR REAL GROSS DOMESTIC PRODUCT?

Authors

  • Dr WILLIAM COLEMAN

    1. Australian National University
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      The author is indebted to the comments of two anonymous referees, Peter Warr and Harry Bloch. The usual disavowals apply.


Abstract

The paper presents a simple theoretical case for the superiority of the notion of Real Gross Domestic Income to Gross Domestic Product. It is shown that, in a multi-period version of the familiar neoclassical model of a small, open economy, a temporary improvement in its terms of trade will increase welfare and RGDI, and produce a trade surplus in current prices; but will decrease real GDP, on account of it creating a trade deficit at constant prices.

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