The Korean economy recorded strong GDP growth of 3.8% year on year in the first quarter of this year, supported by the semiconductor upturn. At the same time, rising semiconductor prices led to a marked improvement in the terms of trade, lifting gross domestic income (GDI) by 13.2%, far outpacing GDP growth. The increase in GDI is expected to support a recovery in domestic demand by strengthening household purchasing power and firms’ capacity to invest. In particular, if global semiconductor demand remains strong and the improvement in the terms of trade—and the resulting rise in GDI—persists for an extended period, its macroeconomic spillovers could differ from those observed in the past. This paper compares the characteristics of the current terms-of-trade improvement and its spillovers to domestic demand with past episodes, and draws policy implications.

The current terms-of-trade improvement has several features that clearly distinguish it from past episodes. Of the four major periods of terms-of-trade improvement since the 2000s, the previous three—2009, 2015–16, and 2020—were all driven primarily by declines in import prices, particularly global oil prices. This time, by contrast, the improvement is being led by rising export prices amid strong semiconductor prices. Moreover, the current semiconductor upturn reflects not merely short-term supply-demand factors but a structural increase in demand associated with AI diffusion, suggesting that both its magnitude and duration could exceed those of past cycles. Favorable terms-of-trade conditions are therefore expected to persist for a considerable period, supporting robust GDI growth.

These distinctive features are also likely to make the spillovers to domestic demand different from those in the past. On the consumption side, previous terms-of-trade improvements were driven by lower oil prices, and the resulting income gains tended to be perceived as temporary. This time, however, structural demand for semiconductors is driving higher export prices and an improvement in the terms of trade, making households more likely to perceive the associated income gains as persistent. Together with the wealth effect from rising equity prices, this is expected to strengthen the recovery in consumption. On the investment side, during past terms-of-trade improvements, profit gains stemming from lower oil prices and other input costs translated into investment only with a lag. This time, profitability is improving on the back of stronger global semiconductor demand, making investment—particularly by semiconductor firms—more likely to expand rapidly. Furthermore, with the current terms-of-trade improvement combining global AI diffusion with prospects for stabilizing global oil prices as geopolitical risks ease, the shock is expected to be both sizable and persistent. Accordingly, its spillovers to domestic demand are likely to be greater than in previous episodes.

That said, the concentration of the benefits from the recent terms-of-trade improvement in specific sectors, particularly IT, may partly constrain its broader macroeconomic impact. In the household sector, wage gains and capital gains are concentrated among high-income and high-wealth households, whose marginal propensity to consume and wealth effects are relatively low. Across industries, investment in non-IT sectors is likely to remain subdued, reflecting the combination of weak business conditions in recent years and cost pressures arising from geopolitical risks. In addition, the semiconductor industry has relatively low production and employment inducement effects, while its high dependence on imported production equipment and the expansion of outward foreign direct investment in response to global supply-chain restructuring may also limit spillovers to domestic demand.

Overall, the current semiconductor upturn and the resulting sharp improvement in the terms of trade are expected to be key drivers supporting growth in domestic demand. However, because the benefits are concentrated in particular industries and income groups, Korea’s medium- to long-term growth path could depend importantly on how these macroeconomic gains are utilized. Policy efforts are therefore needed to strengthen the foundations for future growth while ensuring that the gains spread more broadly across the economy, thereby laying the foundation for sustainable growth. In particular, with IT-led growth expected to continue for a considerable period, Korea needs to strengthen linkages within its domestic semiconductor ecosystem and reinforce its foundations in order to maintain and enhance global competitiveness. At the same time, policymakers should guard against the risk that greater dependence on IT could amplify cyclical, fiscal, and financial volatility. Attention should also be paid to the possibility of greater financial imbalances if the gains from the semiconductor upturn flow into less productive sectors such as real estate rather than productive investment. Over the medium to long term, policy should also take into account the risk that an excessive concentration of resources, including factors of production, in the IT sector could undermine the ecosystems of other key industries and deepen imbalances across income groups.