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Australia’s terms of trade for goods and services, in trend estimate terms, fell sharply from the June quarter 1990 to its lowest level in the decade in September 1993. This fall reflected both declining export prices and strongly rising import prices. Due to decreases in import prices the terms of trade recovered generally for the next four years to peak in September quarter 1997. It decreased again from December 1997 to March 1999 as import prices rebounded, but since then, Australia’s terms of trade have been on an upward trend because of rising exports prices.
A country’s terms of trade shows a country’s export prices relative to its import prices. It is expressed as an index, which is calculated by dividing an index of prices received for exports by an index of prices paid for imports.
A rise in the index implies an improvement in a country’s terms of trade, making it possible to purchase more imports with the same amount of exports. An improvement in a country’s terms of trade occurs when export prices rise, when import prices fall, when export prices rise at a faster rate than import prices, or when export prices fall at a slower rate than import prices.
A fall in the index occurs when a country’s terms of trade deteriorates. It is necessary to export more to purchase the same amount of imports. A deterioration occurs when import prices rise, when export prices fall or when import prices rise at a faster rate than export prices, or when import prices fall at a slower rate than export prices.
The adjusted CPI index is the ratio of the Australian consumer price index to the weighted geometric average of exchange rate adjusted consumer price indexes for Australia’s four major trading partners for the period 1984-85 to 1987-88 (United States, Japan, United Kingdom, and West Germany).
The adjusted GDP deflator index is the ratio of the GDP deflator for Australia to the weighted geometric average of exchange rate adjusted GDP deflators for Australia’s four major trading partners.
The adjusted unit labour cost index is the ratio of unit labour costs in the non-farm sector of the Australian economy to the weighted geometric average of the exchange rate adjusted unit labour cost indexes estimated for the business sectors of Australia’s four major trading partners.