Terms of Trade


Monthly Statistical Bulletin Feature Articles

Australia is heavily dependent on trade for its economic well-being. Its exports amount to around one-fifth of gross domestic product as does its imports. In these circumstances, an upward movement in import prices without a corresponding movement in export prices means that Australia is economically worse off, i.e., Australia needs to export more to maintain the same level of imports.

Australia s terms of trade is an index which shows the relativity between Australia s export and import prices.

Terms of trade

Australia s terms of trade is calculated as the ratio of export prices to import prices. If this index increases it implies that Australia is receiving relatively more for its exports; if it decreases then Australia is receiving relatively less. An increase in export prices relative to import prices implies that Australia is better off; thus an increase in the terms of trade is sometimes referred to as a favourable movement in the terms of trade. A fall in the terms of trade means that Australia must export more goods and services to maintain the same level of imports.

The Australian Bureau of Statistics calculates and publishes a quarterly terms of trade series. It is calculated as the implicit price deflator for the export of goods and services divided by the implicit price deflator for the import of goods and services, multiplied by 100.

Export and import implicit price deflators are indexes which show how export and import prices respectively are different from the base year (currently 2002 03) defined as 100.0.

Australia s terms of trade since 1959 are in Figure 1.

Commodity price index

Usually because Australian traders are a relatively small part of a large world market which sets prices, Australian traders have very little influence on the price, i.e. for most commodities, Australian traders are price takers.

Although the relative importance to the Australian economy of commodity exports is declining, they still make up more than half of Australia s total export trade. The Reserve Bank of Australia (RBA) produces a number of commodity price indexes to provide an indicator of the prices received by Australia s commodity exporters. Figure 2 shows the RBA US dollar index of commodity prices (not in MESI) and the terms of trade since 1982. It suggests a close association between the terms of trade and the commodity price index.

Exchange rate

Because most goods and services that Australia trades on the international market are bought and sold under contracts denominated in US dollars, the value of the Australian dollar in terms of the US dollar the foreign exchange rate has an association with the terms of trade. However, while the correlation is close there have been times, in 1999 and 2000 for example, when the terms of trade and the value of the Australian dollar moved in opposite directions.

Figure 3 shows the Australian dollar exchange rate and the terms of trade since 1969.

MESI Table 6.3

Monthly Economic and Social Indicators Table 6.3 shows:

  • quarterly seasonally adjusted and annual average implicit price deflators for the export of goods and services
  • quarterly seasonally adjusted and annual average implicit price deflators for the import of goods and services and
  • quarterly and annual average terms of trade.

The terms of trade is graphed to show the movement in the series over the past five years.

MESI e-data Table 6.3

MESI e-data quarterly terms of trade data begin with the September 1959 quarter.

This feature was prepared by Greg Baker

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