Macroeconomic effects of terms of trade fluctuations in commodity exporting advanced economies

ABSTRACT

The paper examines the impact of world commodity prices on national output and trade balances in Australia, Canada, New Zealand, and Norway, OECD economies that, unlike other advanced economies, are heavily dependent on commodity exports. Contrary to Dutch disease theory based on real exchange rate adjustment, it highlights the relative price effects of terms of trade (ToT) changes on gross domestic product and net exports with reference to the experience of this unique set of OECD countries. The econometric analysis verifies key predictions of this alternative perspective that ToT fluctuations should (i) have no significant short-run impact on GDP and that (ii) due to relative price effects a strong positive relationship between the ToT and net exports is unlikely.

KEYWORDS:

• Terms of trade
• commodity exporting advanced economies
• GDP
• trade balance

JEL CLASSIFICATION:

• F41
• F14

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ A related literature examines whether developing economies’ reliance on commodity exports stymies economic development via the “resources curse” (see Lederman and Maloney 2007; Van Der Ploeg 2011; Frankel 2012).

² See for instance Sachs (1981), Frenkel and Razin (1996) and Obstfeld and Rogoff (1996).

³ See for instance Gali and Monacelli (2005) and Lubik and Schorfheide (2007).