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6  Conclusion

The first part of this paper examined how the trend and volatility of the terms of trade have affected New Zealand’s economic growth since 1950. The literature generally suggests that an upward trend in the terms of trade is growth-enhancing while increased volatility in the terms of trade has an adverse effect on growth. Putting this into a New Zealand context, this paper extended the work of Grimes (2006) and found that the level of (real) export prices has had a positive impact on New Zealand’s economic growth between 1950 and 2005. However, it was also found that the level of (real) import prices has had an insignificant effect on economic growth over this time. This is surprising given that the majority of New Zealand’s capital goods are sourced from overseas and one would expect that higher prices for these goods would deter new investment and therefore reduce economic growth. This analysis also found that volatility in the terms of trade (particularly import price volatility) has had a negative impact on New Zealand’s GDP growth. While this is unsurprising, as increased volatility will deter new investment decisions, what is surprising is that the volatility in export prices was found to have had an insignificant impact on GDP growth.

This paper also looked at the historical trends and volatility of the terms of trade to see if they have changed over time. It was found that there was no statistical evidence that the terms of trade has declined since 1900. This appears to reject the Prebisch-Singer hypothesis that New Zealand’s terms of trade should experience a long-term decline. In fact looking at the post-1973 period, there is evidence that the terms of trade has been on an upward trend. The volatility in the terms of trade has also fallen over this period and calculations show that the reduction in export price volatility made the larger contribution to the reduction in terms of trade volatility. This observation appears to be a variance with the finding that export price volatility has had an insignificant impact on economic growth. However, it was also found that total terms of trade volatility has had a significant negative impact on growth and therefore the growth effects of export price volatility may be working through this channel.

Arguably the major reasons for the increasing trend and reduction in volatility of the terms of trade are compositional change and the de-commodification of some goods exports. However, improved institutions within New Zealand that allow resources to shift more efficiently in response to relative price shocks and the more recent phenomenon of the growing presence of China in the international market are also likely reasons.

The conclusions one can draw from this work concerning the outlook for the terms of trade are unclear. There are factors that could result in higher prices for some exports, such as the continued de-commodification of New Zealand’s primary commodity exports, further world trade reform and the growing demand from China as more of the population enjoys higher income levels. However, these could be offset by lower prices for some other exports due to increased supply from some emerging markets such as South America or the continued downward pressure China is putting on world manufacturing prices, including New Zealand manufactured export prices. The same can be said for New Zealand import prices. Some import prices may stay relatively low in future as New Zealand sources more of its manufactured goods from “low-cost” countries such as China and the ASEAN countries. However, China’s growing presence on the world market may also result in other import prices being higher in the future, for example oil prices.

Although the outlook for the terms of trade is uncertain, there are polices that could help to highlight the positive factors discussed above which could then have positive growth implications. One of these is the continued push for world trade reform, particularly in agriculture. New Zealand is already playing a role in this area and it will need to continue in this vein. The potential for higher export prices as a result of trade liberalisation is large. Other policies that may help include the development of opportunities for New Zealand firms to export more value-added products. This will give them more price-setting power overseas and the opportunity to develop niche markets. The marketing of New Zealand products overseas may also assist with this. Also important to consider are the institutions within New Zealand. It was suggested that one reason why New Zealand’s terms of trade has increased over the past three decades is that its institutions have a greater ability to respond to relative price movements than they did in the past, therefore resulting in the terms of trade becoming more endogenous. If policies can be developed that would continue to allow the efficient response to relative price movements, or policies that lower the adjustment costs from shifting these resources, then this could see the terms of trade continue to increase.

One area of work that was not examined in this paper was the drivers of import price volatility. It was found that volatility in import prices have had a significant negative impact on New Zealand’s economic growth. If future research is able to examine what has been causing the volatility, then there may be an opportunity to address it and this could also have positive economic growth implications.

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