The alleged negative consequence of higher productivity : An empirical analysis on the effect of relative productivity on terms of trade

Abstract: The relationship between increased productivity and improved standard of living is not a questioned statement on the global level, but does productivity growth necessarily lead to higher standard of living on the national level? Supported by empirical results it is suggested that a high relative productivity growth should not always be worth striving for, since it translates into decreased welfare, in terms of deteriorated terms of trade. This study attempts to examine the impact of relative productivity on the terms of trade in the OECD-countries and in Sweden, with an error-correction model. Further is an extension of the purpose made in order to estimate the impact of increased relative productivity growth on the welfare. The results suggest that the method for measuring productivity has a great impact on the findings, but concludes that a 1% higher relative labour productivity growth is associated with a 0.23% decline in the terms of trade.