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

  • Grimes, Arthur

    ()

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

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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File URL: http://www.med.govt.nz/about-us/publications/publications-by-topic/occasional-papers/2006/06-04-pdf/view
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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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  1. Turnovsky, Stephen J. & Chattopadhyay, Pradip, 2003. "Volatility and growth in developing economies: some numerical results and empirical evidence," Journal of International Economics, Elsevier, vol. 59(2), pages 267-295, March.
  2. Francesco Caselli & James Feyrer, 2005. "The Marginal Product of Capital," NBER Working Papers 11551, National Bureau of Economic Research, Inc.
  3. Robert A Buckle & David Haugh & Peter Thomson, 2001. "Calm after the Storm?: Supply-side contributions to New Zealand’s GDP volatility decline," Treasury Working Paper Series 01/33, New Zealand Treasury.
  4. Sebastian Edwards & Eduardo Levy Yeyati, 2003. "Flexible Exchange Rates as Shock Absorbers," NBER Working Papers 9867, National Bureau of Economic Research, Inc.
  5. Robert J. Barro, 1995. "Inflation and Economic Growth," NBER Working Papers 5326, National Bureau of Economic Research, Inc.
  6. Mendoza, Enrique G., 1997. "Terms-of-trade uncertainty and economic growth," Journal of Development Economics, Elsevier, vol. 54(2), pages 323-356, December.
  7. 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,Centre for International Research on Economic Tendency Surveys, vol. 2004(2), pages 227-257.
  8. 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.
  9. Chang-Tai Hsieh & Peter J. Klenow, 2003. "Relative prices and relative prosperity," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
  10. Jonathan Eaton & Samuel Kortum, 2004. "Trade in Capital Goods," Levine's Working Paper Archive 228400000000000019, David K. Levine.
  11. William Easterly & Michael Kremer & Lant Pritchett & Lawrence H. Summers, 1993. "Good Policy or Good Luck? Country Growth Performance and Temporary Shocks," NBER Working Papers 4474, National Bureau of Economic Research, Inc.
  12. Bloomfield, Arthur I, 1984. "Effect of Growth on the Terms of Trade: Some Earlier Views," Economica, London School of Economics and Political Science, vol. 51(202), pages 187-93, May.
  13. Wells, Graeme & Evans, Lewis, 1985. "The Impact of Traded Goods Prices on the New Zealand Economy," The Economic Record, The Economic Society of Australia, vol. 61(172), pages 421-35, March.
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