Estimating Terms of Trade Levels

This paper exploits bilateral product-level trade for a wide range of OECD countries to derive export and import PPPs and terms of trade levels. This is based on a hedonic regression model in which a product is characterized by the location of both the buyer and seller. Relative price levels of imports and exports are significantly different from one in most countries, confirming the widespread existence of barriers to arbitrage. Richer countries appear to benefit from higher terms of trade. JEL classification: C82, E31 and F19 Acknowledgements: We were lucky to benefit from outstanding statistical assistance by Ton van Moergastel and Robert Inklaar, which is gratefully acknowledged. We also wish to thank participants at workshops at the University of Groningen and University of California, Davis, in particular Bettina Aten, Erwin Diewert, Robert Feenstra and Prasada Rao for helpful discussions. * Corresponding author: Marcel P. Timmer, Faculty of Economics, University of Groningen, PO Box 800, 9700 AV Groningen, The Netherlands, tel.: 050-363 3653, fax: 050-363 7337, E-mail: [email protected]