Abstract
This study examines instability of a country's income terms of trade in preference to its export receipts and uses a two-step decomposition. First, the normalised variance of the income terms of trade is explained in terms of the variance of its two components, the commodity terms of trade and the export quantity index. Then the variance of these indices is explained in terms of the variance of the individual commodity components. The model is applied to the New Zealand economy during 1962/1963 to 1978/1979. Interaction terms account for a large part of the total variance, indicating that the structure of the domestic economy is an important determinant of trade instability.
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