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

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.

Citation

Grimes, Arthur. 2006. "A Smooth Ride: Terms of Trade, Volatility and GDP Growth," Journal of Asian Economics, 17:4, pp. 583-600.