Economic growth is usually measured by looking at how much GDP expressed in constant prices increases over time. For countries with large foreign trade, however, it may be better to study real GDP. It is a measure that also takes into account how the prices of our export products develop in relation to how much we have to pay for imports.
GDP can be measured in a variety of ways. If you are studying growth, you usually use a measure that is expressed in fixed prices. Such a calculation removes the effects of price changes and therefore shows how the produced volume of goods and services develops from one year to another.
However, looking only at the production volume has its shortcomings. In particular, this applies to countries that, like Sweden, have a relatively large foreign trade. Such countries also depend on how much they get paid for their export products and how much they have to pay for their imports. This relationship between export and import prices is called the terms of trade.
If the terms of trade are strengthened, the country’s total purchasing power increases – export prices rise faster than import prices. When this occurs, exports can pay for an increased import volume without weakening the net trade. Of course, the reverse is also true. If import prices increase more than the prices of what we export, we lose purchasing power. A measure that takes such changes into account is called real GDP and shows more clearly than GDP at constant prices how consumption opportunities develop for a country.
There are several different reasons why the terms of trade may weaken, for example that the currency depreciates. What was above all behind the weakening between the years 1998-2005 was, however, a sharp rise in the price of oil and to some extent also falling prices for the export of telecommunications products (read more in depth from the Norwegian Economic Institute).