"Semiconductor Boom and Improved Terms of Trade to Have Greater Ripple Effect on Domestic Demand Than Ever Before"

GDI-GDP Gap Hits Record 9.4 Percentage Points Since Statistics Began

Rising Semiconductor Prices Drive Up Export Prices, Improving Terms of Trade

Wage Increases Expected to Support Consumption Growth

Semiconductor Gains Concentrated i

There is an analysis suggesting that the recent rise in semiconductor prices, which has led to improved terms of trade for Korea, will generate a greater domestic ripple effect through consumption and investment compared to past periods of improvement.

Containers are piled up at Pyeongtaek Port, Gyeonggi Province. Photo by Yonhap News.

The Bank of Korea stated this in the "BOK Issue Note – Why Is This Terms of Trade Improvement Different: Real Economy Ripple Effects of the Current Semiconductor Boom (Jongwoong Lee, Daae Kim, Jinsu Han)" released on July 19. The recent upturn in the semiconductor industry and the resulting significant improvement in terms of trade are expected to serve as key drivers supporting further domestic demand growth. However, since the benefits of the semiconductor boom are concentrated in certain industries and sectors, the country's mid- to long-term growth trajectory may differ depending on how these gains are leveraged.

The terms of trade index is calculated by dividing export prices by import prices, representing the amount of imports that can be purchased with a single unit of exports. When import prices decrease or export prices increase, Korea can buy more imported goods with its exports, and thus the terms of trade are considered to have improved. The recent improvement is evident in gross domestic product (GDP) and gross domestic income (GDI) indicators for the first quarter of this year. Real GDP grew by 3.8% year-on-year in the first quarter, while GDI increased by 13.2% over the same period, outpacing GDP substantially. This result reflects the fact that GDI accounts for the terms of trade. The gap between GDI and real GDP growth rates in the first quarter of this year (9.4 percentage points) was the largest since statistics began in 1960.

Jongwoong Lee, Team Head of Economic Research at the Bank of Korea's Research Bureau, noted, “The recent improvement in terms of trade is unusual not only in its magnitude but also in its underlying causes.” Since the 2000s, there have been three instances of improved terms of trade, all resulting from a fall in international oil and other import prices. This time, however, Lee explained that it is the increase in export prices driven by higher semiconductor prices that is leading to the improvement in terms of trade.

Lee projected that “the upward trend in semiconductor prices will continue for a considerable period, sustaining the improvement in terms of trade.” The current semiconductor boom is attributed to structural demand growth from the expansion of artificial intelligence (AI), beyond short-term supply-demand factors, suggesting a broader and longer-lasting cycle than previous ones. As a result, favorable terms of trade are expected to persist for some time, with GDI maintaining a solid upward trajectory.

He also assessed that the ripple effects on the domestic market will differ from the past, as the improvement in terms of trade has been driven by rising export prices. In previous periods, when terms of trade improved due to falling import prices, the associated increase in income was seen as temporary, so the boost to private consumption was limited. By contrast, with the current semiconductor-driven structural demand raising export prices and improving terms of trade, the ripple effect on domestic demand could be much larger. In particular, Lee projected that wage growth could support an upward trend in consumption. He explained, “If wage increases are implemented through collective bargaining agreements next year, improved income conditions should translate into a stronger domestic demand effect. In fact, there have been growing demands for wage hikes in industries beyond semiconductors, and if these demands are reflected in collective agreements, increased wages could become visible and translate into higher consumption.”

The analysis also found that the ripple effect could be greater than before due to increased investment by semiconductor companies and an improved fiscal environment from increased tax revenues. However, Lee warned that since the success of the semiconductor boom has been concentrated in certain industries and sectors, long-term growth could differ depending on how these gains are distributed. He emphasized, “To spread the success of the semiconductor industry into domestic materials, components, equipment firms, and the broader manufacturing sector, it is necessary to organically integrate and advance the industrial ecosystem focusing on the semiconductor cluster.”

He also pointed out the need to be vigilant against the potential for financial imbalances if the semiconductor boom’s gains flow into non-productive sectors such as real estate rather than productive investment. On prices, Lee observed that the shock from improved terms of trade could create upward pressure on demand in the services sector and elsewhere moving forward. He concluded, “In the mid- to long-term, policies must also address the risk that excessive resource concentration in the IT sector could undermine other key industries’ ecosystems and worsen inequality between sectors and social groups.”

This content was produced with the assistance of AI translation services.