Trade Improves Due to Rising Export Prices... Key Driver for Consumption and Investment

South Korea's terms of trade have seen a notable improvement, largely attributed to a surge in export prices, particularly in the semiconductor sector. This has resulted in Gross Domestic Income (GDI) growing significantly faster than Gross Domestic Product (GDP). The Bank of Korea (BOK) analyzed this trend, noting that the current improvement differs markedly from previous periods where trade conditions improved due to declining import prices.

Historically, periods of improved terms of trade, such as in 2009, 2015-2016, and 2020, were primarily driven by falling import prices, like oil. In contrast, the first quarter of this year saw export prices rise, leading to a 13.2% increase in GDI year-on-year, far surpassing the 3.8% GDP growth. The gap between GDI and GDP reached 9.4 percentage points, the widest since statistics were first compiled in 1960. GDI is calculated by adding the real trading gains from changes in terms of trade to GDP.

The BOK highlighted that the rise in export prices was predominantly from the information technology (IT) sector, with semiconductors playing a key role. Semiconductor prices surged by 92.5% compared to the previous year in the first quarter, accounting for 73.4% of the overall increase in export prices. The central bank forecasts that favorable terms of trade and robust GDI growth, significantly exceeding GDP growth, will persist for some time, citing the sustained expansion of AI-driven semiconductor demand and expected stabilization of oil prices due to easing Middle East tensions.

Furthermore, the BOK anticipates that the impact of these improved trade conditions on the real economy will differ from past experiences. While past improvements driven by lower import prices saw limited growth in private consumption and delayed investment increases, the current export price-driven improvement has led to a more significant rise in consumption and immediate investment expansion. This analysis is based on a study of 20 instances of import price-driven improvements and five instances of export price-driven improvements between the first quarter of 2002 and the fourth quarter of 2025.

However, the BOK also pointed out a limiting factor: the benefits of this economic upswing are concentrated among high-income and high-asset individuals. The strong performance of IT companies is expected to increase tax revenues, improving fiscal conditions. Yet, the concentration of benefits in specific sectors and demographics raises concerns about equitable distribution and potential economic imbalances. The BOK emphasized the need for strategic utilization of these gains to shape the long-term growth trajectory and suggested integrating and advancing the industrial ecosystem, particularly around semiconductor clusters. The bank also cautioned against increased volatility in economic, fiscal, and financial sectors due to high IT dependency and the risk of financial imbalances if gains flow into non-productive sectors like real estate.