The Impact of Income Terms of Trade Changes on Private Savings

Abstract

The terms-of-trade fluctuations have been an important factor in explaining macroeconomic capacity while foreign demand for certain export commodities is inflexible and has a significant impact on their economies in the shocks of external terms of trade. Changes in the external terms of trade might harm private savings while higher inflation rates and lower levels of social security tend to increase private savings due to higher uncertainty. This paper analyzes the characteristics of China’s income terms of trade (ITT) and private savings from 2000 to 2019 based on the related macroeconomic literature and the functioning factors affecting the long-term private savings. Empirical regression models are constructed, and the results suggest that improvement of income terms of trade by 1% leads to an increase in private saving rate by 0.413%, but this relationship has the opposite effect after the 2008 global financial crisis. Policy recommendations are proposed on the promotion of independent innovation ability of foreign trade and the optimization of trade structure along with other progressive analyses on China’s current problems in foreign trade.