Terms of Trade Effects and Real Income Measures

Assuming that measures of trading gains or losses are available, various different real income aggregates may be defined within the system.

93SNA provides two alternative frameworks to derive real measures for income aggregates like real Gross National Income and real Gross National Disposable Income.

This alternative follows the sequence of accounts; starting at GDP at constant prices and GDI in real terms, and ending at real net national income. The steps needed to move from one real income aggregate to the next involve the deflation of flows between residents and non-resident institutional units. There is no obvious choice of price deflator, but 93SNA recommends that the purchasing power of these flows should be expressed in terms of a broadly based numeraire, like the set of goods and services that make up gross domestic final expenditure. In other words, it is recommended to deflate these flows with the price index for gross final domestic expenditure,
P^DOMESTIC.

The second alternative follows another accounting framework; starting at GDP at constant prices, adding imports and subtracting exports at constant prices to reach gross domestic final expenditure at constant prices. To go from the concepts of gross to net, consumption of fixed capital at constant prices is subtracted. Using this alternative a new aggregate, compared to alternative 1, is developed; net domestic final expenditure at constant prices. An implicit deflator for this aggregate can then be derived. To go from net domestic final expenditure at constant prices to net national disposable income in real terms net current receipts from abroad measured in real terms are added. Net current receipts from abroad in real terms includes the deflated value of the current balance (exports - imports), the deflated value of net primary incomes from abroad and the deflated value of net current transfers from abroad, all deflated by the price index for net domestic final expenditure, P^NET-DOMESTIC.

Since this alternative uses the price index for net domestic final expenditure it requires a constant price estimate for consumption of fixed capital. If that is not available, gross terms can be used, ending up at gross national disposable income, and using the deflator for gross domestic final expenditure, P^DOMESTIC.

93SNA does not define any concept of real savings. However, real savings is for different analytical purposes an interesting concept, and widely used by economists in the World Bank.
Savings, in current prices, is defined as the difference between disposable income and consumption. Gross National savings in real terms can be defined as gross national disposable income in real terms less total final consumption expenditure at constant prices.

Real income measures in the World Bank database - LDB

The Live Data-Base (LDB) contains macroeconomic data, including national accounts statistics, for most countries. The database contains the countries own estimates, as well as real income estimates derived within the Bank. Below is a short description on the real income measures contained, how they are derived and information on the choice of deflators.

Terms of trade effect - The terms of trade effect is derived using the import price index as deflator. The choice of using the import price index instead of a more broad price index like the deflator for domestic final expenditure, is perhaps a choice of ‘convenience’ rather than a belief that all countries will use their increased purchasing power on imported goods and services only.

Real Gross Domestic Income - GDI_REAL will be defined in the LDB as in 93SNA;
GDP_KP + Terms of trade effect.
(GDI is a term defined in real terms only.)

Real Gross National Product - GNP_REAL is derived in LDB as GDP_KP + net income from abroad deflated with the deflator for total domestic final consumption. GNP_REAL is not a concept in neither 93SNA nor 68SNA, but is a concept used within the Bank for analytical purposes.

Real Gross National Income - GNI_REAL is the sum of GDI_REAL and net income from abroad in real terms. It is also equivalent with GNP in real terms + the terms of trade effect. In LDB, net income from abroad is deflated with the deflator for domestic final expenditure.

Real Gross Domestic Savings - GDS_REAL is defined as GDP_KP + Terms of trade effect - C_KP - G_KP. Domestic savings is not a national accounts term (it is not mentioned in the SNA), but a term constructed and used by international organizations like the World Bank for analytical purposes.

Real Gross National Savings - GNS_REAL is defined as GDS_REAL + net income from abroad in real terms + net current transfers in real terms from abroad. Both net income and net current transfers from abroad should be deflated with the deflator for total domestic final expenditure. The term Real Saving (usually) refers to national, and not domestic, savings.

Since not all countries derive a measure of GDP from the expenditure side, an estimate for P^DOMESTIC will not always be available. In this cases are alternative deflators, like the CPI, used.