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3.1.1 Has New Zealand’s terms of trade declined over time? (continued)

There appear to be three distinct periods when the ratio of world commodity prices to world manufacturing prices experienced different properties. Prior to 1920, the ratio was at a relatively high level. However, after a downward shock around 1920 the level appears to be permanently lower, and stayed around this level until the mid-1970s. Some suggest that the downward shock in the 1920s was a result of increased farm production in Europe once soldiers returned from duty after World War I, which led to lower world primary commodity prices. After the mid-1970s the ratio has declined considerably although it has flattened out in the last 15 years which may be a result of falling relative manufacturing prices (at the same speed as primary commodity prices) as “low-cost” countries such as China increase their presence in international markets.[11]

Figure 5 displays the ratio of New Zealand goods export prices to world commodity prices and the ratio of New Zealand goods import prices to world manufacturing prices. An interesting observation is that the ratio of New Zealand’s export prices to world commodity prices has been increasing while the ratio of import prices to world manufacturing prices has stayed relatively flat. The upward trend in “relative” export prices also appears to have accelerated after the mid-1970s and helps explain why New Zealand’s goods terms of trade has a smaller downward trend than the ratio of world commodity prices to world manufacturing prices as shown in Figure 5. Because of this, one may ask why New Zealand has not performed better relative to other countries since 1975. New Zealand typically compares itself to other OECD countries and these countries are generally manufactured goods exporters rather than primary commodity exporters. Therefore, rather than being able to draw conclusions from Figure 5 about New Zealand’s relative performance compared with the OECD, it may be more appropriate to compare it to other primary commodity exporters (which are typically developing countries). It suggests that New Zealand has experienced higher prices for its exported goods than other primary commodity exporters.

Figure 5 – Relative Export and Import Prices
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Sources: Grilli and Yang, IMF, NZIER, Statistics New Zealand

Section 4 looks in more detail at some of the reasons why New Zealand’s terms of trade is higher than implied by real world commodity prices and why the ratio of New Zealand export prices to world commodity prices has increased dramatically since the mid 1970s.

Notes

  • [11]This point is discussed further in Section 5.2.
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