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

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.