The Treasury

Global Navigation

Personal tools


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

4.1.2  Impact on volatility

The significant reduction in volatility in the terms of trade is also likely to be due to the compositional change in New Zealand’s exports. As previously discussed, New Zealand has moved from exporting a limited range of commodities to exporting a much broader array of goods. This has left it less exposed to large swings in the price of individual commodities. For example in 1950, the price of wool more than doubled as a result of strong demand owing to the onset of war in Korea. At the time, wool made up approximately 30% of total goods exports and this led to the terms of trade increasing by 29% between 1949 and 1950. In recent times however, the largest share of any single commodity is dairy at 18%. If the price of dairy products were to double (or halve) the impact on the terms of trade would be much less (but still significant).[18] Another reason for the reduction in volatility recently, as suggested by Gillitzer and Kearns (2005), is that with an increased proportion of New Zealand exports being manufactured, the compositional differences between the import and export baskets has reduced and so any price shocks are likely to affect both export and import, with less effect on the terms of trade.

Not only has New Zealand moved into producing a greater proportion of manufactured goods, but it has increased the “value-added” of many of its primary commodity products. Black, Vink and White (2003) discuss how there has been a steady decrease in the proportion of goods exports leaving New Zealand in an essentially unprocessed form. Figure 10 below (from their paper) shows how the proportion of total unprocessed products has gone from over 27% of total goods exports in 1988 to just 15% in 2001. Elaborately transformed manufactures, as well as primary product manufactures, made up the majority of the off-setting increase. This latter category of exports has been dominant throughout, and still accounts for nearly half of New Zealand’s total merchandise exports and includes goods such as meat and most dairy products.

Figure 10 – New Zealand’s Good Exports by Level of Processing
Sources: Statistics New Zealand, Black, Vink and White (2003)

Kaplinsky (2005) suggests that this reduction in volatility is a world-wide phenomenon and is a result of “de-commodification” of some primary products. The term de-commodification refers to commodities now being less homogeneous than they once were, enabling producers to benefit from higher barriers to entry as it is more difficult for new firms to enter and compete in the same markets. Kaplinsky cites the anecdotal example of Jamaican Blue Mountain coffee as evidence of this occurring. This type of coffee is a premium product and has been able to avoid the downward price pressures that the market has experienced recently. It is suggested that demand for this type of coffee is much more inelastic than for other coffee varieties enabling producers greater power in setting prices. Kaplinsky also suggests that this characteristic is becoming more widespread and falling primary commodity prices are not an inevitable outcome, as more value is added to basic commodities.

The impetus for the increase in the prices of niche-based “soft commodities” lies in the growth of per capita incomes of the high-income economies. This is a form of Engels Law reversal, which is reflected in the fact that the most accurate predictor of the per capita incomes of shoppers in UK supermarkets lies in the proportion of fresh fruit and vegetables in their shopping trolleys.Kaplinsky, 2005:10

There is evidence that New Zealand is also “de-commodifying” some of its exports in order to reduce price variability and gain market share. An example of this is shown in Figure 11 below which displays how the lamb export product mix has changed in the last 30 years. In 1970/71 lamb carcases made up over 90% of total lamb exported; in 2003/04 this had fallen to less than 4%. There has been a move into the more ‘value-added’ products such as processing a carcase into cuts and boneless products. This is also illustrated by Figure 10 which shows that the share of total unprocessed products has fallen since 1988.

Figure 11 – Export Lamb Product Mix
Source: Meat & Wool New Zealand Economic Service


  • [18]In fact the impact on the terms of trade could be proportionately less as dairy exports have been diversified into products such as casein and cheeses for example.
Page top