Global Experiences and the Korean Perspective
KDI/EWC series on Economic Policy
Edited by Chin Hee Hahn, Sang-Hyop Lee and Kyoung-Soo Yoon
Chapter 7: Terms of Trade in Korea: Causes of Decline Since the Mid-1990s and Implications for Green Growth
Chin Hee Hahn and Sung-Hyun Ryu INTRODUCTION Korea’s terms of trade have declined secularly since the mid-1990s. During the period 1996–2006, the terms of trade declined at a rate of −5.6 percent per year, reflecting both the decline in export prices and the increase in import prices. As a result, the growth rate of real gross domestic income, which was 3.0 percent per year, has not kept up with the growth rate of GDP, which was 4.6 percent. To a large extent, the gap between the production and income growth rates can explain why people’s feelings about business conditions have tended to be more pessimistic than what official statistics indicate since the 1997–98 Asian financial crisis. It is well known that the decline in Korea’s terms of trade for the past decade or so has been largely driven, in an accounting sense, by the rise in import prices of crude oil and raw materials as well as the decline in export prices of semiconductor and information technology products. However, studies that explore the economic causes of the terms-of-trade decline in Korea are rare. Although the rapid growth of large developing economies, such as China and India, has been frequently pointed out to be responsible for the rise in prices of oil and raw materials, rigorous empirical studies are also hard to find. This chapter aims to examine causes of the recent terms-of-trade decline in Korea. To set the stage, the next section evaluates the patterns of Korea’s terms-of-trade...
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