Executive summary

This paper uses a real income measure referred to as real gross domestic income (GDI), to examine the 2003-to-2007 period, when an unprecedented rise in commodity prices occurred. As a result, changes in the terms of trade occurred throughout the developed world. In resource-rich, resource exporting countries, a rising terms of trade allowed individuals, governments and businesses to turn their production into consumption and investment at an accelerated rate. In resource importing countries, growth in consumption and investment lagged behind production growth.

Real GDI combines changes in production (real gross domestic product [GDP]) with changes in the purchasing power of that production on world markets (a trading gain). Using real GDI breaks the fixed relationship between real income and production that occurs when real GDP is used. Real GDI is interpreted as a measure of purchasing power, or absorption, rather than a measure of production.

By using real GDI, questions are answered about how the rapid increases in resource prices from 2003 to 2007 affected OECD nations, and how that period compares to previous resource cycles.

1. Is the 2003-to-2007 period unusual?

1. The 2003-to-2007 years are historically unusual because of the breadth of commodities for which prices increased. Across almost all commodities, from energy to lumber to minerals to grains, prices rose. During previous episodes of rapid commodity price change, price increases tended to be more concentrated in a particular area, such as energy prices in the 1970s.

1. How did the rapid increase in resource prices effect relative prices?

1. The rapid climb in commodity prices increased the prices of commodities (inputs) relative to the price of manufactured goods (outputs). As a result, those countries that export commodities in order to import manufactured goods saw the value of their exports rise, while countries that export manufactured goods in order to import commodities saw the value of their exports fall.
2. A numerical estimate of the trade-off between resources and manufactured products is provided by the terms of trade. The terms of trade rose in resource exporting nations, while it declined in resource importing nations.

1. What countries benefited the most from the resource boom? What countries benefited the least? Did benefits from the resource boom translate into changes in consumption and investment?

1. The biggest beneficiaries of the resource boom were resource exporting, manufacturing importing nations like Norway, Australia, New Zealand and Canada. In these countries, real consumption and real investment grew faster than real GDP as the terms of trade increased, allowing them to turn their stream of production into a larger stream of consumption or investment because the value of their exports had increased. The effect was similar to flying with a tail wind – they moved forward, but at a faster rate than their output growth would imply.
2. The countries that benefited the least were manufacturing exporting, resource importing nations like Japan, Korea and the United States, where the terms of trade worked against consumers, businesses and governments. As the value of their exports declined, these countries had to send more goods abroad to purchase the inputs to their production processes, thereby reducing the supply of goods for domestic consumption and investment. The effect in these countries was similar to flying into a head wind – they moved forward, but at a slower rate than their output growth would imply.

1. What countries ‘performed’ the best relative to the United States, between 2003 and 2007?

1. Comparisons of economic performance depend greatly on the metric used between 2003 and 2007. An efficiency measure, like labour productivity for example, shows resource-rich, resource exporting nations like Norway, Australia, New Zealand and Canada falling behind the United States. Moving to a real GDI per capita measure, however, (which includes the effect of the resource boom on purchasing power), shows these four countries gaining ground on the United States.
2. Answering the question, ‘What country performed best between 2003 and 2007?’, therefore, requires specificity about whether one is interested in a measure of production efficiency or a measure of purchasing power.