Multilateral Comparisons of Productivity, Terms‐of‐Trade and Factor Accumulation

This paper proposes a new approach for multilateral comparisons using index numbers. The new approach combines two recently‐proposed innovative techniques to examine differences among economies at various levels. The Minimum Spanning Tree algorithm, based on the idea of minimizing substitution bias of bilateral comparisons, provides a possible ordering for panel data. Making use of the suggested ordering, bilateral Törnqvist price and quantity indexes are calculated and multilateral indexes are obtained by chaining. An index‐number based approach is then used to decompose the differences in GDP at the bilateral level. Different sources that contribute to the differences in GDP are considered: productivity differences, terms of trade differences, factor endowments differences and domestic output price differences. The newly formed indexes are base‐invariant which provides strong support for using the technique for multilateral comparisons. An illustration of the technique using data from China and four OECD countries is included.