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Decomposing New Zealand's Terms of Trade

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  • Phillip Mellor

    (The Treasury)

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.

Suggested Citation

  • Phillip Mellor, 2015. "Decomposing New Zealand's Terms of Trade," Treasury Working Paper Series 15/16, New Zealand Treasury.
    • Handle: RePEc:nzt:nztwps:15/16
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    File URL: https://treasury.govt.nz/sites/default/files/2015-12/twp15-16.pdf
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    Cited by:

    1. Magomedov, Rustam (Магомедов, Рустам) & Idrisova, Vittoria (Идрисова, Виттория), 2018. "Sectoral Indices of the Terms of Trade: Development of Methodology and Overview for Russia [Отраслевые Индексы Условий Торговли: Разработка Методики И Обзор Для России]," Working Papers 061822, Russian Presidential Academy of National Economy and Public Administration.

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    JEL classification:

    • I1 - Health, Education, and Welfare - - Health

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