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Past, Present and Future Developments in New Zealand’s Terms of Trade

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This paper looks at the importance of the terms of trade for the New Zealand economy by examining the impact of changes in the trend and volatility of the terms of trade on economic growth. It is found that the volatility in the terms of trade has had a negative impact on New Zealand’s economic growth between 1950 and 2005. However, it is found that rather than the level of the terms of trade having an impact on growth, it is the level of export prices that have had a significant positive effect with the level of import prices having an insignificant impact. This paper also examines the historical patterns in the trend and volatility to see if and why they have changed over time. As New Zealand is largely an exporter of primary commodities and importer of manufactures, the Prebisch- Singer hypothesis suggests that its terms of trade should have declined over time. However, this paper finds that the terms of trade has not declined and in fact, is showing an increasing trend since 1974. It is also found that the volatility in the terms of trade has declined over time. Using this evidence as well as other issues such as world trade reform and China, this paper draws conclusions as to future movements of New Zealand’s terms of trade as well as any possible economic growth implications.

Suggested Citation

  • Philip Borkin, 2006. "Past, Present and Future Developments in New Zealand’s Terms of Trade," Treasury Working Paper Series 06/09, New Zealand Treasury.
    • Handle: RePEc:nzt:nztwps:06/09
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    File URL: https://treasury.govt.nz/sites/default/files/2007-09/twp06-09.pdf
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    References listed on IDEAS

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    2. 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, vol. 32(3), pages 459-483, December.
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    4. Bleaney, Michael F & Greenaway, David, 1993. "Long-Run Trends in the Relative Price of Primary Commodities and in the Terms of Trade of Developing Countries," Oxford Economic Papers, Oxford University Press, vol. 45(3), pages 349-363, July.
    5. Jushan Bai & Pierre Perron, 1998. "Estimating and Testing Linear Models with Multiple Structural Changes," Econometrica, Econometric Society, vol. 66(1), pages 47-78, January.
    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 1-2.
    7. Cashin, Paul & McDermott, C. John & Scott, Alasdair, 2002. "Booms and slumps in world commodity prices," Journal of Development Economics, Elsevier, vol. 69(1), pages 277-296, October.
    8. Andrews, Donald W K & Ploberger, Werner, 1994. "Optimal Tests When a Nuisance Parameter Is Present Only under the Alternative," Econometrica, Econometric Society, vol. 62(6), pages 1383-1414, November.
    9. Robert A Buckle & Kunhong Kim & Heather Kirkham & Nathan McLellan & Jared Sharma, 2002. "A structural VAR model of the New Zealand business cycle," Treasury Working Paper Series 02/26, New Zealand Treasury.
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    Cited by:

    1. Obiakor, Rowland & Okwu, Andy & Akpa, Emeka, 2021. "Terms of Trade, Trade Openness and Government Spending in Nigeria," MPRA Paper 110977, University Library of Munich, Germany.
    2. 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, vol. 24(6), pages 990-1017, November.
    3. Philip McCann, 2009. "Economic geography, globalisation and New Zealand's productivity paradox," New Zealand Economic Papers, Taylor & Francis Journals, vol. 43(3), pages 279-314.

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    More about this item

    Keywords

    Terms of trade; Commodity Prices; New Zealand; Economic Growth; Prebisch-Singer Hypothesis;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • F10 - International Economics - - Trade - - - General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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