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Working paper

Decomposing New Zealand's Terms of Trade (WP 15/16)

Issue date: 
Tuesday, 8 December 2015
Status: 
Current
View point: 
Document Date: 
Publication category: 
JEL classification: 
E30 - Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data)
F10 - Trade: General
F14 - Empirical Studies of Trade
F17 - Trade: Forecasting and Simulation
ISBN: 
978-0-908337-38-5

Formats and related files

This paper adds to the understanding of how New Zealand's terms of trade have evolved since 1991. The paper develops a method to decompose the percentage change in the terms of trade into the contributions from different export and import components.

Abstract

This paper adds to the understanding of how New Zealand's terms of trade have evolved since 1991. The paper develops a method to decompose the percentage change in the terms of trade into the contributions from different export and import components. The contributions are further decomposed into the contributions attributable to changes in deflators (prices) and contributions from changes in the composition of the export and import baskets. The methodology can be applied to a variety of timeframes to assess the drivers of short and long term fluctuations in the terms of trade. Three key insights emerge from applying the decomposition to New Zealand. Firstly, the decomposition supports the view that increasing export prices have made the largest contribution to gains in the terms of trade over the past two decades. Secondly, the change in the composition of the import basket is shown to have made a material positive contribution to gains in the terms of trade. Import prices have been a drag on the terms of trade over longer timeframes, although in recent years they have made a positive contribution. Finally the paper does not find a material impact from the change in the composition of exports over time.

Acknowledgements

I am grateful to Philip Borkin, Patrick Conway, Michael Johnston, and Michael Reddell for comments on an earlier draft of this paper. I would also like to acknowledge the support of the Treasury Forecasting team.

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 or the New Zealand Government. The New Zealand Treasury and the New Zealand Government take 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.

Last updated: 
Wednesday, 9 December 2015