This paper analyses the latest (2005) data available from the World Bank’s InternationalComparison Program (ICP). It assesses the extent to which the prices of goods and services in New Zealand (NZ) differ from those observed in other OECD countries, and Australia in particular.
The main objective is to answer the question: “Are the prices of specific goods and services especially high or low in New Zealand by international standards?” The answer appears to be “yes”, leading naturally to the further questions of: “why, and what might the consequences be for prices and productivity in the wider New Zealand economy?” International price comparisons, even those undertaken carefully such as the ICP, are fraught with difficulties and results should be interpreted cautiously. However, a number of broad features of price levels in NZ relative to other OECD countries stand out.
Most prominently, goods and services associated with investment in general, and property, construction and utilities (water, gas, electricity) in particular, appear to be relatively expensive in NZ. Secondly, passenger transport (excluding private motor vehicles), and alcohol & tobacco, prices are high relative to other countries. The former involve transport industries - such as air and rail transport - that are subject to domestic and international regulation, or have some quasi-monopoly power within the NZ economy. In some cases, lack of economies of scale may also be relevant due to the limited size of the domestic NZ market. High alcohol, and especially tobacco, prices appear to be at least partly related to relatively high excise levels in NZ, though this is balanced to some extent by relatively low VAT/GST rates. Thirdly prices for key exportable products from New Zealand are relative cheap – especially beef/veal/lamb, fish, and dairy products such as butter which may reflect New Zealand’s comparative advantage in such goods.
By contrast expensive tradable products include poultry, pork and fresh milk; services that are largely government provided – such as education, health and social protection, and hence are inherently difficult to measure or interpret – are also relatively inexpensive in NZ, reflecting NZ’s relatively low average wage levels within the OECD, despite higher intermediate and capital input costs. The large share of wages in total costs in these services make them important determinants of measured (non-market) prices in these activities.