Changes in the terms of trade should be reflected in GDP measure

Comments on Peter Martin "Election 2016: GDP growth nowhere near as good as it seems, but it'll do for the prime minister", 1/06/2016

It seems there is a need to incorporate the very different effects on the living standard of changes in the terms of trade in the GDP measure. This is because that changes in the terms of trade is quite qualitatively different from changes in domestic relative prices irrespective they are inflationary or deflationary.

While changes in prices generally have the effects of transfering wealth from one group to another, the effects have quite different impacts if they occur through changes in the terms of trade.

Changes in prices purely domestically, the transfer of wealth is within a country and therefore they total wealth of the nation has not changed.

When changes in the terms of trade, the transfer, however, is between two different nations. As a result, the nation's wealth will increase if the terms of trade increases and it will decrease with the deterioration in the nation's terms of of trade.

To conclude, there should be some measure to distinguish these two kind of changes in relative prices to capture the changes in the terms of trade on a nation's living standard for any given real GSP growth as currently measured.