Korea’s Real National Income Rises 3.1 Percent as Terms of Trade Outpace 0.6 Percent Growth
South Korea’s real gross national income rose 3.1 percent in the second quarter while real gross domestic product rose 0.6 percent, the central bank said on Tuesday, confirming the growth figure it had already given in its advance estimate.
Income grew 5.2 times as fast as output on our calculation. The bank explains the gap in one line, and it is about what the country’s exports can buy.
Three measures of the same quarter
| Second quarter, real, adjusted | Level, trillion won | Change on the quarter | Change on a year earlier |
|---|---|---|---|
| Gross domestic product | 600.5 | up 0.6 percent | up 3.7 percent |
| Gross domestic income | 659.0 | up 3.7 percent | up 15.7 percent |
| Gross national income | 666.8 | up 3.1 percent | up 15.6 percent |
Chain linked at 2020 prices, seasonally adjusted. Domestic income is output plus the real trading gain from the change in the terms of trade; national income is domestic income plus net factor income from abroad, both definitions as the bank states them. The published levels round rather than sum exactly.
Most of the distance between income and output is a purchasing power gain rather than extra domestic production. When export prices rise faster than import prices, the same volume of exports commands more imports, and the bank converts that into what it calls the real trading gain. That gain rose to 58.5 trillion won from 38.7 trillion in the first quarter, an increase of 19.8 trillion, while real net factor income from abroad fell to 7.9 trillion from 11.6 trillion, a fall of 3.7 trillion. The bank’s own summary is that the trading gain more than offset the decline in factor income.
Nothing in the expenditure account matches the income figure. Private consumption rose 0.4 percent, government consumption 0.1 percent, facilities investment 0.2 percent and construction investment fell 0.1 percent. Exports rose 1.3 percent and imports 0.7 percent. Intellectual property products investment at 3.4 percent is the fastest line and still short of 3.1 percent income growth on a like for like reading of the quarter.
The price gap is where the gain comes from
The export deflator rose 56.6 percent on the year and the import deflator 21.0 percent, a gap of 35.6 percentage points on our calculation. That spread is the terms of trade improvement the bank cites. Domestic demand prices excluding inventories rose 3.6 percent, against a GDP deflator of 21.9 percent, so the price pressure is almost entirely external.
The nominal figures follow. Nominal GDP reached 834.9 trillion won for the quarter, up 9.2 percent on the quarter and 26.4 percent on the year, and nominal gross national income 846.9 trillion, up 8.8 and 26.4 percent. The 21.9 percent rise in the deflator explains most of that 26.4 percent nominal increase, with real output of 3.7 percent and the interaction of the two accounting for the rest.
The saving side moved with the income. The gross saving rate rose 3.9 percentage points on the quarter to 45.6 percent and the household net saving rate 0.9 points to 9.7 percent, while the gross domestic investment rate fell 1.1 points to 24.2 percent. Both ratios are measured against gross national disposable income rather than output, so the 21.4 point gap between them is not a current account ratio. Real household gross disposable income rose 2.1 percent, well behind the 3.1 percent national figure, so households captured part of the gain and not the whole of it.
Why it matters: Korea has been paid better for the same work. Output grew 0.6 percent, income 3.1 percent, and the difference sits in an export deflator running at 56.6 percent against an import deflator at 21.0. A terms of trade gain is real income, but it is reversible in a way that output growth is not, because prices that rise that fast can fall. The income gain also did not lift investment: the gross investment rate fell to 24.2 percent of gross national disposable income while the saving rate rose to 45.6.
Outlook: The third quarter advance estimate is due in late October. What decides the gap between income and output is the spread between export and import prices together with net factor income from abroad, not the export deflator alone, and factor income has already fallen for a quarter. The saving and investment rates moving further apart would be the second signal.
Sources: Bank of Korea.
