Prices, Exchange Rates and Export Competitiveness of New Zealand: an assessment using Divisia Indices

This paper computes Divisia price and volume indices from quarterly data of New Zealand exchange rates and exports to explore the relationship between New Zealand’s domestic inflation and the changes in its exchange rates over the period 1983 – 93. This is a period when the New Zealand economy underwent major reforms with the initial aims of disinflation at home and improved competitiveness in world markets. This paper examines empirically the relationships between these two aims with the help of Divisia indices. It examines, specifically, the international competitiveness of New Zealand’s four major export items in five major markets. Divisia indices, their variances, covariances and correlations, are analysed to check whether and to what extent the competitiveness of the selected exports were affected in the markets in question as a result of the domestic price and exchange rate movements. The findings throw some interesting light on the relationships being investigated.