Never Mind the Volumes, Check those Prices

A development often overlooked in the doom-mongering on Australia’s current account is the stunning growth in Australia’s terms of trade, 10% y/y in Q4.  The rising terms of trade were explicitly mentioned in yesterday’s statement by the RBA rationalising its decision to raise official interest rates.

The improvement in the terms of trade reflects strength in export prices relative to import prices, implying an improvement in Australia’s national purchasing power.  Australia has fortuitously become a net consumer of those goods for which prices are in secular decline, like ICT, while remaining a net producer of goods and services for which prices have been rising.

An important implication of the improvement in the terms of trade is that volume based measures such as GDP will understate the gains associated with this improvement in national income.  As import prices fall and volumes rise, this will count as a subtraction from growth, even though we are demonstrably better off from the improvement in national income.

The ABS get some major brownie points for highlighting this in a feature article in yesterday’s national accounts release. Extracts from the article can be found over the fold…

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posted on 03 March 2005 by skirchner in Economics

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