Feature Article—Terms of Trade
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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