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Long-term Patterns in Australia’s Terms of Trade

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  • Christian Gillitzer

    (Reserve Bank of Australia)

  • Jonathan Kearns

    (Reserve Bank of Australia)

Abstract

We examine two important aspects of Australia’s terms of trade using 135 years of annual data up to 2003/04. Since Australia predominantly exports commodities and imports manufactures, the Prebisch-Singer hypothesis suggests that there should be a negative trend in the terms of trade. But the trend is no more than –0.1 per cent per annum, less than the trend decline in world commodity prices relative to manufactured goods prices. The weaker trend appears to be the result of Australia exporting, and importantly diversifying toward, commodities with faster price growth. Extending the sample using projections for the terms of trade for the two years to 2005/06 based on commodity price movements to date, the apparent downward trend disappears. Indeed, based on these projections, the terms of trade will have increased by around 50 per cent over the period 1987–2006, unwinding the decline over the preceding 30 years. We also investigate the volatility of the terms of trade and demonstrate that it was significantly higher between 1923 and 1952. This is attributable to substantially higher volatility in the export prices of a few key commodity exports. Volatility declined after 1952 due to smaller shocks to the prices of these goods. The diversification in Australia’s export base since then means that the terms of trade are less susceptible to shocks to prices of individual commodity exports.

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Bibliographic Info

Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2005-01.

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Date of creation: Apr 2005
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Handle: RePEc:rba:rbardp:rdp2005-01

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Keywords: terms of trade; commodity prices; Prebisch-Singer;

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References

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  6. Paul Cashin & Hong Liang & C. John McDermott, 2000. "How Persistent Are Shocks to World Commodity Prices?," IMF Staff Papers, Palgrave Macmillan, vol. 47(2), pages 2.
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  8. Kwiatkowski, D. & Phillips, P.C.B. & Schmidt, P., 1990. "Testing the Null Hypothesis of Stationarity Against the Alternative of Unit Root : How Sure are we that Economic Time Series have a Unit Root?," Papers 8905, Michigan State - Econometrics and Economic Theory.
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Citations

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Cited by:
  1. Ellis Connolly & David Orsmond, 2011. "The Mining Industry: From Bust to Boom," RBA Annual Conference Volume, in: Hugo Gerard & Jonathan Kearns (ed.), The Australian Economy in the 2000s Reserve Bank of Australia.
  2. María Virginia Mattheus & Alberto Martín Díaz Cafferata, 2011. "Co-movements in terms of trade volatility in land-abundant countries," Working Papers 07/11, Instituto Universitario de Análisis Económico y Social.
  3. A.F.M. Kamrul Hassan & Ruhul A. Salim, 2011. "Is there any Link Between Commodity Price and Monetary Policy? Evidence from Australia," Economic Analysis and Policy (EAP), Queensland University of Technology (QUT), School of Economics and Finance, vol. 41(3), pages 205-216, December.
  4. Vanessa Rayner & James Bishop, 2013. "Industry Dimensions of the Resource Boom: An Input-Output Analysis," RBA Research Discussion Papers rdp2013-02, Reserve Bank of Australia.
  5. Alan Bollard & Mark Smith, 2006. "Major global developments in the new millennium," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 69, pages 14p., June.
  6. Ellis Connolly & David Orsmond, 2011. "The Mining Industry: From Bust to Boom," RBA Research Discussion Papers rdp2011-08, Reserve Bank of Australia.
  7. Ian W. McLean, 2010. "Responding to Shocks: Australia's Institutions and Policies," School of Economics Working Papers 2010-30, University of Adelaide, School of Economics.
  8. Jarkko Jääskelä & Penelope Smith, 2011. "Terms of Trade Shocks: What are They and What Do They Do?," RBA Research Discussion Papers rdp2011-05, Reserve Bank of Australia.
  9. José Luis Arrufat & Alberto Martín Díaz Cafferata & José Antonio Viceconte, 2011. "Terms of trade cycles in extreme land abundant countries, 1870-2009. Spectral analysis," Working Papers 05/11, Instituto Universitario de Análisis Económico y Social.

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