Sunday, January 25, 2009

Terms of Trade in Down Under

The December quarter trade prices release saw the largest quarterly and annual increases in export prices since the current series began in the September quarter 1974, at 15.9% q/q and 54.9% y/y. Import prices were up 10.8% q/q and 21.1% y/y, the largest annual increase since the December quarter 1985. The merchandise terms of trade are up nearly 30% on a year ago.

How did Australia pull-off a further gain in the terms of trade against the backdrop of collapsing world commodity prices? The depreciation in the Australian dollar over the quarter, which supported Australian dollar commodity prices. This is a very good illustration of the role of a floating exchange rate in insulating the economy against external shocks.

- The Terms of Trade: Not Dead Yet

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