New Zealand's merchandise terms of trade improved almost 6% in the December quarter from the previous quarter, data out from Statistics NZ today shows.

In fact, the increase in the terms of trade was the largest since 1976 and followed six consecutive quarterly falls. Year-on-year, however the index was down more than 8%, as those previous declines accumulated.

The terms-of-trade index measures the amount of imports a fixed amount of exports will purchase.

Economists generally were expecting a much smaller improvement, more in the range of 2-3%. In the December quarter, a rising NZ$ tended to reduce the price of both imports and exports, but stronger world prices for our commodities helped boost the merchandise terms-of-trade.

The falls in the prices of imports were primarily driven by mechanical machinery (down 8.6%) and electrical machinery and apparatus (down 10%). Petroleum products were also down 4.3%.

In contrast, prices for exported goods fell only marginally in the December 2009 quarter.

Statistics NZ also publishes data on terms-of-trade for services, which showed minimal quarter-on-quarter improvement, but significant year-on-year gains. The cost of international services we use is starting to fall quite quickly, and these benefits seem to lag about half a year from the merchandise price changes. The chart for Services is here.