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A Smooth Ride: Terms of Trade, Volatility and GDP Growth

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  • Grimes, Arthur

    ()
    (Motu Economic & Public Policy Research, and University of Waikato)

Abstract

International evidence indicates that higher terms of trade levels and lower terms of trade volatility contribute to enhanced growth outcomes, especially for commodity-export and developing countries. New Zealand's terms of trade have been high and remarkably stable since the early 1990s compared with past experience. We analyse the proximate reasons behind these high, stable terms of trade and then examine whether this terms of trade behaviour explains growth outcomes since 1960. Attention is paid to growth outcomes over a variety of economic regimes. Approximately half the variance in annual GDP growth over 45 years can be explained by the level and volatility of the terms of trade. The relationship is robust across four economic regimes.

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Bibliographic Info

Paper provided by Ministry of Economic Development, New Zealand in its series Occasional Papers with number 06/4.

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Length: 38 pages
Date of creation: May 2006
Date of revision:
Handle: RePEc:ris:nzmedo:2006_004

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Keywords: Terms of trade; export diversification; volatility; GDP growth;

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  1. Chang-Tai Hsieh & Peter J. Klenow, 2007. "Relative Prices and Relative Prosperity," American Economic Review, American Economic Association, American Economic Association, vol. 97(3), pages 562-585, June.
  2. Robert Buckle & David Haugh & Peter Thomson, 2003. "Calm after the storm? Supply-side contributions to New Zealand's GDP volatility decline," New Zealand Economic Papers, Taylor & Francis Journals, Taylor & Francis Journals, vol. 37(2), pages 217-243.
  3. Stephen Turnovsky & Pradip Chattopadhyay, 1998. "Volatility and Growth in Developing Economies: Some Numerical Results and Empirical Evidence," Working Papers, University of Washington, Department of Economics 0055, University of Washington, Department of Economics.
  4. Robert J. Barro, 2013. "Inflation and Economic Growth," Annals of Economics and Finance, Society for AEF, Society for AEF, vol. 14(1), pages 121-144, May.
  5. Francesco Caselli, 2007. "The Marginal Product of Capital," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 122(2), pages 535-568, 05.
  6. Robert A. Buckle & David Haugh & Peter Thomson, 2004. "Markov Switching Models for GDP Growth in a Small Open Economy: The New Zealand Experience," Journal of Business Cycle Measurement and Analysis, OECD Publishing,CIRET, OECD Publishing,CIRET, vol. 2004(2), pages 227-257.
  7. Bloomfield, Arthur I, 1984. "Effect of Growth on the Terms of Trade: Some Earlier Views," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 51(202), pages 187-93, May.
  8. Jonathan Eaton & Samuel Kortum, 2001. "Trade in Capital Goods," NBER Working Papers 8070, National Bureau of Economic Research, Inc.
  9. Garey Ramey & Valerie A. Ramey, 1994. "Cross-Country Evidence on the Link Between Volatility and Growth," NBER Working Papers 4959, National Bureau of Economic Research, Inc.
  10. Edwards, Sebastian & Levy Yeyati, Eduardo, 2005. "Flexible exchange rates as shock absorbers," European Economic Review, Elsevier, Elsevier, vol. 49(8), pages 2079-2105, November.
  11. Wells, Graeme & Evans, Lewis, 1985. "The Impact of Traded Goods Prices on the New Zealand Economy," The Economic Record, The Economic Society of Australia, The Economic Society of Australia, vol. 61(172), pages 421-35, March.
  12. Easterly, William & Kremer, Michael & Pritchett, Lant & Summers, Lawrence H., 1993. "Good policy or good luck?: Country growth performance and temporary shocks," Journal of Monetary Economics, Elsevier, Elsevier, vol. 32(3), pages 459-483, December.
  13. Mendoza, Enrique G., 1997. "Terms-of-trade uncertainty and economic growth," Journal of Development Economics, Elsevier, Elsevier, vol. 54(2), pages 323-356, December.
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Cited by:
  1. Arthur Grimes & Sean Hyland, 2013. "Passing the Buck: Impacts of Commodity Price Shocks on Local Outcomes," Working Papers, Motu Economic and Public Policy Research 13_10, Motu Economic and Public Policy Research.
  2. Fabling, Richard & Sanderson, Lynda, 2008. "Firm Level Patterns in Merchandise Trade," Occasional Papers, Ministry of Economic Development, New Zealand 08/3, Ministry of Economic Development, New Zealand.
  3. Daan Steenkamp, 2014. "How volatile are New Zealand’s terms of trade? An international comparison," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, Reserve Bank of New Zealand, vol. 77, pages 3-14, June.
  4. Buckle, Robert A. & Kim, Kunhong & Kirkham, Heather & McLellan, Nathan & Sharma, Jarad, 2007. "A structural VAR business cycle model for a volatile small open economy," Economic Modelling, Elsevier, Elsevier, vol. 24(6), pages 990-1017, November.
  5. Dan Andrews & Daniel Rees, 2009. "Macroeconomic Volatility and Terms of Trade Shocks," RBA Research Discussion Papers, Reserve Bank of Australia rdp2009-05, Reserve Bank of Australia.
  6. Hock Wong, 2010. "Terms of trade and economic growth in Japan and Korea: an empirical analysis," Empirical Economics, Springer, Springer, vol. 38(1), pages 139-158, February.

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