▲ Containers stacked at Pyeongtaek Port
The Bank of Korea (BOK) has analyzed that the recent rise in semiconductor prices, which has led to an improvement in South Korea's terms of trade, is expected to have a greater ripple effect on domestic demand through consumption and investment compared to previous periods of improvement.
In its BOK Issue Note titled "Why This Improvement in Terms of Trade Is Different: The Real Economic Impact of the Semiconductor Boom," released today (July 19), the central bank stated, "The recent semiconductor boom and the resulting significant improvement in terms of trade will serve as a key driver supporting the growth of domestic demand going forward."
According to the report, South Korea's terms of trade have recently improved to an unprecedented degree.
Terms of trade are calculated by dividing export prices by import prices, representing the amount of imports that can be purchased with one unit of exports.
An improvement in terms of trade is assessed when import prices fall or export prices rise, increasing the volume of imports the country can purchase through its exports.
This recent improvement in terms of trade is clearly reflected in the gross domestic product (GDP) and gross domestic income (GDI) indicators for the first quarter.
While real GDP grew by 3.8% in the first quarter compared to the same period last year, GDI grew by 13.2%, significantly outperforming GDP, as GDI accounts for terms of trade.
In other words, the actual volume of goods the country can purchase has increased much more than its total production volume.
The gap between GDI and real GDP growth in the first quarter of this year was 9.4 percentage points, the largest since statistics were first compiled in 1960.
The BOK explained that the recent trend of improving terms of trade is unusual not only in its intensity but also in its background.
Since the 2000s, there have been three periods of improvement in terms of trade, all of which were the result of falling import prices, such as international oil prices. In contrast, the current improvement is being driven by rising export prices due to the surge in semiconductor prices.
The BOK expects this rise in semiconductor prices to continue for a considerable period, leading to a sustained improvement in terms of trade.
In the report, the BOK explained, "The current expansion phase of the semiconductor industry is driven by structural demand growth due to the spread of artificial intelligence, beyond short-term supply and demand factors, which makes it highly likely that the scale and duration will exceed past cycles. Accordingly, favorable terms of trade are expected to persist for a considerable period, and GDI is projected to maintain a solid growth trend."
The BOK analyzed that as rising export prices drive the improvement in terms of trade, the ripple effect on domestic demand will also differ from the past.
In the past, even if terms of trade improved due to falling import prices like oil, the resulting income increase was perceived as temporary, limiting the effect on private consumption. However, recently, structural demand for semiconductors is driving export price increases and terms of trade improvements, which could lead to a significant ripple effect on domestic demand.
In particular, the bank projected that wage increases could support the trend of consumption improvement.
Lee Jong-woong, Deputy Director of the Research Department at the Bank of Korea, who authored the report, said, "We believe that improvements in income conditions and domestic demand effects through wage increases will appear around next year, when companies' wage and collective agreements are implemented. As wage growth is spreading to other sectors beyond semiconductors, these wage increases could translate into consumption."
The report also pointed out that the ripple effect could be greater than in the past, not only through consumption but also through increased investment by semiconductor companies and improved fiscal management conditions due to higher tax revenue.
The BOK advised, "However, as the achievements of the semiconductor boom are concentrated in certain industries and groups, the medium- to long-term growth path may vary depending on how these are utilized. There is a need to organically integrate and upgrade the industrial ecosystem so that the achievements of the semiconductor industry can spread to domestic materials, parts, and equipment companies and the manufacturing sector as a whole."
(Photo: Yonhap News)
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