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Past, Present and Future Developments in New Zealand's Terms of Trade - WP 06/09

Publication Details

  • Past, Present and Future Developments in New Zealand's Terms of Trade
  • Published: Jul 2006
  • Status: Current
  • Author: Borkin, Philip
  • JEL Classification: E30; F10; F41; F43
  • Hard copy: Available in HTML and PDF formats only.
 

Past, Present and Future Developments in New Zealand’s Terms of Trade

New Zealand Treasury Working Paper 06/09

Published July 2006

Author: Philip Borkin

Abstract

This paper looks at the importance of the terms of trade for the New Zealand economy by examining the impact of changes in the trend and volatility of the terms of trade on economic growth. It is found that the volatility in the terms of trade has had a negative impact on New Zealand’s economic growth between 1950 and 2005. However, it is found that rather than the level of the terms of trade having an impact on growth, it is the level of export prices that have had a significant positive effect with the level of import prices having an insignificant impact. This paper also examines the historical patterns in the trend and volatility to see if and why they have changed over time. As New Zealand is largely an exporter of primary commodities and importer of manufactures, the Prebisch-Singer hypothesis suggests that its terms of trade should have declined over time. However, this paper finds that the terms of trade has not declined and in fact, is showing an increasing trend since 1974. It is also found that the volatility in the terms of trade has declined over time. Using this evidence as well as other issues such as world trade reform and China, this paper draws conclusions as to future movements of New Zealand’s terms of trade as well as any possible economic growth implications.

Contents

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Abstract

Table of Contents

List of Tables

List of Figures

1 Introduction

2 Why are the terms of trade important?

3 Trends and volatility in New Zealand’s terms of trade

4 Why have the trend and volatility changed?

5 Factors likely to influence the terms of trade in the future

6 Conclusion

Appendix 1 – Data Description and Source

Appendix 2 – Decomposing New Zealand’s economic growth

References

twp06-09.pdf.pdf (279 KB) pp. 1–38

List of Tables

List of Figures

Acknowledgements

I would like to gratefully acknowledge the help of Bob Buckle for comments on an earlier draft. I would also like to thank Arthur Grimes, John Ballingall, Craig Beaumont, Patrick Conway, Khoon Goh, Richard Downing, and Alex Harrington for their helpful comments as well as Kam Szeto and Dean Hyslop for their help with some empirical tests. Finally I would like to thank Daniel Lawrence and Rob Davison for their help with data. Of course all remaining errors are my own.

Disclaimer

The views, opinions, findings, and conclusions or recommendations expressed in this Working Paper are strictly those of the author(s). They do not necessarily reflect the views of the New Zealand Treasury. The Treasury takes no responsibility for any errors or omissions in, or for the correctness of, the information contained in these working papers. The paper is presented not as policy, but with a view to inform and stimulate wider debate.

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