Price Dynamics in Trade: A Price Deflator for India’s Services Trade

This paper develops a services trade deflator by incorporating India’s trade share across major service categories and using price proxies from global and domestic indices. It examines price convergence in services trade based on the Law of One Price (LOOP) hypothesis, the findings suggest that most major services show convergence. The evidence of price convergence improves using panel unit root tests under the cross-sectional dependence. The study suggests using trade-weighted CPI/PPI indices to improve price proxies and mitigate coverage bias. A comparison with NAS-based deflators shows alignment until 2019-2020, but discrepancies emerged during COVID-19 and widened in recent years. The paper highlights the importance of choice of deflators in SNA 2025 and monetary policy, emphasising their role in accurately measuring real economic activity, assessing external sector performance, and guiding policy decisions by central banks.