After 2004, measured growth in labor productivity and total factor productivity slowed. We find little evidence that this slowdown arises from growing mismeasurement of the gains from innovation in information technology-related goods and services. First, the mismeasurement of information technology hardware is significant preceding the slowdown. Because the domestic production of these products has fallen, the quantitative effect on productivity was larger in the 1995-2004 period than since then, despite mismeasurement worsening for some types of information technology. Hence, our adjustments make the slowdown in labor productivity worse. The effect on total factor productivity is more muted. Second, many of the tremendous consumer benefits from the "new" economy such as smartphones, Google searches, and Facebook are, conceptually, nonmarket: Consumers are more productive in using their nonmarket time to produce services they value. These benefits raise consumer well-being but do not imply that market sector production functions are shifting out more rapidly than measured. Moreover, estimated gains in nonmarket production are too small to compensate for the loss in overall well-being from slower market sector productivity growth. In addition to information technology, other measurement issues that we can quantify (such as increasing globalization and fracking) are also quantitatively small relative to the slowdown.

We are grateful for Mike Harper's assistance with the analysis of the productivity measurement implications. We draw heavily upon Alterman, Diewert and Feenstra (1999), and the authors are indebted to Bill Alterman and Erwin Diewert for that earlier study which we apply here to U.S. productivity growth. For helpful comments we thank seminar participants at Columbia, Harvard, Oxford, and the NBER. For financial support Feenstra and Slaughter thank the National Science Foundation. Finally, the views expressed in this paper are those of the authors, not those of the Bureau of Economic Analysis, and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or of any other person associated with the Federal Reserve System. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.© 2009 by Robert C. Feenstra, Benjamin R. Mandel, Marshall B. Reinsdorf, and Matthew J. Slaughter. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. ABSTRACTSince 1995, growth in productivity in the United States appears to have accelerated dramatically. In this paper, we argue that part of this apparent speed-up actually represents gains in the terms of trade and tariff reductions, especially for information-technology products. We demonstrate how unmeasured gains in the terms of trade and declines in tariffs can cause conventionally measured growth in real output and productivity to be overstated. Building on the GDP function approach of Diewert and Morrison, we develop methods for measuring these effects. From 1995 through 2006, the average growth rates of our alternative price indexes for U.S. imports are 1.5% per year lower than the growth rate of price indexes calculated using official methods. Thus properly measured terms-of-trade gain can account for close to 0.2 percentage points per year, or about 20%, of the 1995-2006 apparent increase in productivity growth for the U.S. economy. Bias in the price indexes used to deflate domestic output is a question beyond the scope of this paper, but if upward bias were also present in those indexes, this could offset some of the effects of mismeasurement of gains in terms of trade.

Foreign trade enables a nation to consume a different mix of goods and services than it produces, so to measure real gross domestic income (GDI) for an open economy, we must deflate by an index of the prices of the things that this income is used to buy, not the price index for GDP. The differences between these two indexes come from the export and import components of the GDP, and are measured by the trading gains index. Fisher indexes are a natural way to estimate the conceptual economic indexes of trading gains and real GDI because they are averages of the theoretical upper and lower bounds of the economic indexes. They can be decomposed in a way that permits analyses of the factors driving changes in trading gains, such as changes in the terms of trade and in the relative price of tradables, or changes in the prices of particular commodities. Applying these methods to the United States, we find that trading gains have a median absolute effect on US real GDI of 0.2 percentage points in annual data. The petroleum price shocks that occurred in late 1973 and in 1980 subtracted more than a full percentage point from the annual growth of real GDI, and in the first half of 2008 price increases in petroleum and other imported commodities subtracted 2 percentage points from the annual rate of growth of real GDI, making it negative despite the steady growth of real GDP. On the other hand, with petroleum prices excluded, US terms of trade begin to improve steadily starting in 1995 and the relative price of tradables falls. These effects increase the growth rate of US real GDI by 0.15 percent per year on average.

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