International Trade (Unit 3 Topic 1)  

Australia's Terms of Trade

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In 2003, a shipload of Australian iron ore bought about 2,200 flat-screen televisions. By 2010 the same shipload bought around 22,000. Nothing changed about the ore. What changed was its price relative to the price of everything Australia buys from the world.

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That ratio is the terms of trade: an index of export prices divided by an index of import prices. It is a price measure, not a volume measure, and confusing the two is the easiest mark to lose on this topic. A rising terms of trade does not mean Australia is selling more. It means each unit of exports now commands more imports in return — a real income gain that shows up in company profits, wages, tax revenue and the budget without a single extra tonne leaving the country.

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For two decades from 1980 the index went nowhere, drifting between 47 and 59. Then China's industrialisation arrived. Demand for steel and energy outran what the world could supply, and by 2011 Australia's terms of trade were the highest in over 140 years. Supply eventually caught up and China's growth shifted away from construction, so the index fell 30% in four years. Australia avoided recession largely because the dollar fell with it — the floating exchange rate absorbing a shock that would once have hit output and jobs directly.

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A second, broader surge followed in 2021–22, when the Ukraine war sent European buyers hunting for alternatives to Russian gas.

The most recent reading shows why the ratio matters. In the June quarter of 2026 export prices actually rose 1.9%, yet the terms of trade fell, because import prices rose faster at 3.5%. Watch both halves of the fraction. The denominator moves too.

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