As prices of major import/export items, such as oil and semiconductors, have recently fluctuated significantly, there is growing interest in the impacts of changes in Korea’s terms of trade (net barter basis) on the domestic economy. An examination of past movements of the terms of trade and the domestic economy shows that there were times when both the terms of trade and the domestic economy deteriorated, but at other times the domestic economy remained strong even when the terms of trade worsened. This paper explains this phenomenon by using a sign-restricted SVAR model, including with respect to global shocks such as global demand shocks, oil supply shocks and semiconductor supply shocks.

The results of an empirical analysis show that the terms of trade and the domestic economic growth rate move in different directions depending on the type of shock. In the event of a shock from increased global demand, the terms of trade worsened while the economic growth rate went up. In the case of a shock from decreased oil supply, on the other hand, both the terms of trade and the economic growth rate declined. When a shock from decreased semiconductor supply occurred, the terms of trade improved but the economic growth rate declined.

In overall consideration of the above, it is important to identify underlying factors first before analyzing how the domestic economy moves in line with changes in the terms of trade. Since the relationship between the terms of trade and domestic economic growth changes depending on the type of global shock, it would be inappropriate to conclude that a worsening of the terms of trade leads to a decline in the economic growth rate or that an improvement in the terms of trade causes the economic growth rate to rise.