A recent survey stated that New Zealand exports were “resiliant” in the face of a massive global recession.
Now this is something that, at first, might seem unusual. New Zealand relies on exports so much, and if the global economy is collapsing surely we will have no-one left to sell too.
However, it is important to remember the difference between “prices” and “quantities”.
When thinking about our place in the global market, we need to think of what happens when there is a market with large and small firms. In such a market, when a large firm changes how much they produce they also change the price. However, when the small firm changes its quantity, it is such a small part of total demand that the price does not change.
These small firms are called “residual claimants”, and they simply face the price that is determined by the major players in the market.
For many goods the New Zealand sells overseas we are a “residual claimant” in the market (which is specified by its location). As a result, when demand collapses in these areas we face lower prices, the the quantity we sell does not change because of demand – it must be because of supply!
If the supply of New Zealand’s export goods is also highly inelastic in the short-term, then in the face of a collapse in global demand we would not expect to see the quantity of exports collapse straight away – instead it would occur overtime as New Zealand producers cut back on production.
Note: We will get a better idea of this when the trade index numbers come out later today!
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