Thursday, March 02, 2006

Terms of trade

My previous post emphasised the role of the RBA in securing sound economic outcomes in Australia over the past decade. The RBA today (here) provided a graphical indication of the luck the Australian economy has enjoyed from improvements in its terms-of-trade via improved commodity prices. The attached graph is informative. Apart from the dip after the Asian economic crisis of 1997 prices have moved strongly upwards over the past decade increasing the real earnings of Australians. Moreover, improvements are continuing. Preliminary estimates for February indicate that a rise of 2.1% in SDR terms following an increase of 1.9% in January. The largest contributors to the rise in February were increases in the prices of wheat, sugar, aluminium, and copper. In Australian dollar terms, the Index rose by 2.4% in February following a rise of 1.9 % in January. There will eventually be a dip but retaining flexible exchange rates should insulate the Australian economy from such a shock.


Bring Back EP at LP said...

just how large would our current account be if not for the terms of trade?

hc said...

The answer to that is unclear. The investment boom concentrated in the resource sector (but spreading throughout the economy) has been triggered by improvements in commodity prices. If the TOT had not improved the economy might have grown less strongly with the current account deficit lower.