Terms of trade are the ratio of export prices to import prices. Higher terms of trade mean exports are relatively more profitable, encouraging the economy to produce more of them and increasing New Zealand’s spending power relative to the rest of the world – it can acquire more imports for the same export production.
There are official estimates of the terms of trade back to 1926, and unofficial estimates back to the 1860s. The series appears volatile largely because for most of the time New Zealand’s main (pastoral) exports were sold in auction-type markets. Import prices have been more stable, although in recent years oil, which is also sold in auction-type markets, has added to their volatility. This volatility has been evened out with a seven-year moving average which shows the underlying trends. During the 19th century the trend was flat (or perhaps slightly falling). It rose in the early 20th century, peaking during the First World War and contributing to an economic boom. In the interwar and Second World War years, terms of trade were broadly flat again, but extremely volatile. There was a major price collapse during the great depression. In the first two decades after the war the terms of trade averaged better than the interwar period, and volatility was lower. But in late 1966 the auction price of wool fell, more or less permanently, relative to import prices. There was a decline in the terms of trade for the next two decades as wool was challenged by synthetics; cheese and red meat by white meats and fish; and butter by margarine and olive oil. The terms of trade may have been rising for New Zealand since about 1990. This is partly due to reductions in the protection levels for farmers in the Northern Hemisphere economies, and partly because economic growth in emerging markets – especially in East Asia – has expanded their demand for foodstuffs.
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Source: Statistics New Zealand