Changes in the terms of trade in goods

16/09/2008 09:30

A new monthly indicator will be added to the economic monitor from September 2008: the terms of trade in goods. The terms of trade reflect the ratio of export prices to import prices.

Why are we interested in changes in the terms of trade?

Developments in the terms of trade reflect how the ratio of export prices to import prices changes. If prices of exports rise more quickly than prices of imports, the terms of trade improve. If import prices rise more quickly than export prices, the terms of trade deteriorate.

Import and export prices

Import and export prices

Changes in terms of trade

Changes in terms of trade

How and where will the changes in terms of trade be published?

Changes in the terms of trade will be published in StatLine (Statistics Netherlands’ electronic database) and in the Economic Monitor (Business cycle dossier) simultaneously with the publication of international trade figures. Only the figures (indices and changes) will be published in StatLine. The Economic Monitor will provide a short monthly analysis of the change in the terms of trade and a graph.

How are the terms of trade calculated?

The calculation is based on the values (in euros) of imported and exported goods as measured monthly by Statistics Netherlands. Changes in these values are calculated, and subsequently corrected at commodity-group level for the effects of price changes. This results in the volume change for imports and exports. If we then divide the volume change of total exports or imports by the volume change of imports or exports respectively, we get the price change of exports or imports respectively. The terms of trade are calculated by dividing the price change for total imports by the price change for total imports. 

Example

Example

What factors are important for terms of trade?

Important factors are the prices of imported raw materials and semi-manufactured products, wage costs per product unit (important for the competitiveness) and currency exchange rates. In addition, more basic elements such as the composition of imports and exports are also significant. 

In principle all variables which determine import and exports prices affect the terms of trade. This makes it very difficult to pinpoint and quantify the effect of specific elements, such as the increase in oil prices. To make things more complicated, the effect of higher costs is often delayed. An increase in the price of raw materials will not usually result in equally large increases in prices of end products in the same month. This delayed effect often has an important bearing on the monthly terms of trade figures.

What does a change in the terms of trade at a certain moment/period  mean? 

An improvement in the terms of trade means that more can be imported for the same exports, irrespective of whether the purchasing power is actually spent on more imports. 

How should changes in the terms of trade be interpreted in terms of the economy?

This depends on the underlying factors (see above). An improvement in the terms of trade may indicate an increase in margins as a result of increased market power, but it may also be the result of rising labour costs and therefore reflect declining competitiveness. In the short term, an improvement in the terms of trade means more wealth: more can be imported for the same exports. On the longer term, this increase in wealth will shrink as a result of lower export volumes as competitiveness weakens.

This new indicator is generated using figures already available at Statistics Netherlands, and involves no extra costs or extra administrative burden.