Decomposing real GDI growth in the Norwegian market economy

A decomposition of the contributions to growth in real national disposable income (NDI) has been published in Statistics Norway’s annual survey of the Norwegian economy. The methodology for decomposing the trading gains into those due to petroleum products and those to non-petroleum products when decomposing the real NDI growth is however, conceptually not correct. An alternative methodology is therefore proposed in this paper for decomposing the real gross domestic income (GDI) growth in the Norwegian market economy into the growth of the multifactor productivity (MFP), the capital and labor inputs, and the trading gains.

The estimated MFP from this methodology can be compared with that from the current productivity accounts at Statistics Norway, and thus, serving as a quality control for data and methodologies applied. The trading gains as defined in this paper can be further decomposed into the terms of trade effect and the real exchange rate effect, and more importantly, by individual traded product.

The estimated results show that the real GDI in 2018 in the Norwegian market economy was more than 4.6 times of that in 1972, and of the total increase in the real GDI over the period, about 47% was due to the capital input, 27% to the MFP, 17% to the trading gains, and only 7% to the labor input.

Over the sample period 1972-2018, the trading gains from ‘Goods’ contributed 0.39 per cent per year, while those from ‘Services’ contributed -0.19 per cent per year to the annual growth of the total trading gains in the Norwegian market economy (0.19 per cent per year). Despite the terms of trade effect outweighing the real exchange rate effect for both ‘Goods’ and ‘Services’, the opposite was true for ‘Crude oil and natural gas’, which, as one of the three main categories of ‘Goods’, contributed mostly to the trading gains from ‘Goods’.

In fact, it was the change of international price of raw oil and natural gas relative to the price of domestic outputs (0.26 per cent per year), together with the large surplus from the oil and gas trade account (accounting for 18% in average of the nominal GDI), i.e. the real exchange rate effect, rather than the relative price of export and import of raw oil and natural gas (0.04 per cent per year), i.e. the terms of trade effect, that contributed mostly to the growth of the trading gains from ‘Crude oil and natural gas’ (0.30 per cent per year) in the Norwegian market economy over the period 1972-2018.

Given the sound theoretical reasoning behind the proposed methodology, as well as the comprehensive results that can be derived from it, the proposed methodology should be considered as a good candidate for better measuring Norwegian economic performance, including the decomposition of the total trading gains into those due to petroleum products and those to others.

 

Authors: Gang Liu