The Relationship between Commodity Prices and Output/exports

Primary commodities are important exports for Fiji, contributing around 60 to 65 percent to total export receipts. Prices of primary commodities have been very unstable, subject to both secular and temporary fluctuations, which in turn, has given rise to unevenness in the value of export earnings and reserve levels. To date, there has not been any empirical evidence on the influence of commodity prices on Fiji’s output or the volume of exports. While some studies have analysed the determinants of output and trade in Fiji (see for example, Williams and Morling, 2000; Prasad, 2000; and Rogers, 2000), none have focused on the relationship between commodity prices and trade or output. This paper takes an econometric approach towards bridging this gap by attempting to explain relationships between primary commodity prices and output/exports in Fiji via an output fluctuation model developed by Williams and Morling (2000) and an export model derived in the paper. The paper finds that primary commodity prices significantly affect real output in the short term. A one percent decline in commodity prices, for instance, leads to a 0.05 percent decline in real output. The findings further reveal that a ten percent fall in commodity prices results in a four percent fall in real exports in the short run. The results show that while the relationship between commodity prices and total output/exports is statistically significant, the responsiveness of these relationships are relatively inelastic.