A Heuristic Approach to Measure Contribution of Foreign Trade to Growth

Abstract

Contribution of final demand components to gross domestic product (GDP) is often measured by a simple aggregated national accounting identity. Under this conventional approach, the contribution of exports is subtracted from imports to compute the contribution of net exports but it fails to split the imported intermediate and final use that is embodied in each domestic final demand. The so-called import-adjusted approach is considered to be an ideal approach to measure the contribution of each final demand component to GDP. This approach splits imported intermediate and final use for each final demand component instead of accumulating all of them in the export component. This paper provides a heuristic approach for the application of import-adjusted approach to time-series data. We show that given a benchmark input-output table and provided with the annual trade statistics, the bias in measuring the contribution of domestic demand and foreign trade can be reduced. More importantly, we have provided a practical approach that does not only reduce man-hours required for database development but also obtain satisfactory findings. Results verify that the conventional approach tends to overestimate the contribution of domestic demands and underestimate the contribution of net trade to GDP.