terms of trade

ABSTRACT: Changes in the terms of trade have consequences of great signifi- cance for the overall economic performance of a country. In this paper the terms of trade (1991-2003) for Pakistan’s crop sector have been worked out to reveal how the sector has performed over time in terms of profitability. Various indices were worked out to view the profitability from different angles using weights, giving due importance to all the contributing factors. The results revealed that Pakistani farmers’ profitability improved slightly during the study period but at the same time overall purchasing power of the farmers dropped. Pakistani farmers are expected to loose and consumers to gain if free agricultural trade (in selected commodities) opened with the neighboring India. It is suggested that farmer friendly policies and cost effective technologies should be transferred to farmers to make agriculture an attractive investment domestically and competitive internation- ally.

This study finds that an increase in terms of terms of trade will lead to an increase in trade balance in the short run, which is consistent with the postulation of the HLM effect. Arize (1966) and Otto (2003), amongst others, report that improved in terms of trade would improve trade balance. However, in the long run, an increase in terms of terms of trade will lead to a decrease in trade balance. Bouakez and Kano (2008), amongst others, show that terms of trade movements do not affect the current account in a significant way. An increase in oil price will lead to an increase in terms of trade. For that reason, an increase in oil price would lead to a decrease in bilateral trade balance. Bollino (2007) reveals that higher price of oil price in the world market will lead to more imports in the US. Moreover, oil price is relatively an important contributor to the bilateral trade balance determination. Ozlale and Pekkurnaz (2010), amongst others, find the significant impact of oil price on trade balance. An increase in foreign demand will lead to an increase in bilateral trade balance. This implies that external economy is important to influence trade balance of Singapore. Bilateral trade balance of Singapore with Malaysia is adversely affected by the Asian financial crisis. Generally, terms of trade, domestic demand, foreign demand and oil price are important in the bilateral trade balance determination not only in the short run but also in the long run.

Bleaney and Greenaway (2001) use stochastic endogenous growth model to empirically examine the impact of terms of trade, exchange rate and their volatilities on growth and investment. They use panel estimations on the data of 14 Sub-Saharan African countries from the period 1980 to 1995. Volatility of terms of trade and real exchange rate is estimated by using Generalized Autoregressive Conditional Heteroscedasticity (GARCH) model. Results show that improvement in terms of trade and less over value exchange rate have significant positive effect on growth and investment while, significant negative relationship is found between volatility of terms of trade and economic growth.

This paper investigated the effect of terms of trade growth and its volatility on economic growth in Sub-Saharan Africa. I employed dynamic panel data models of difference and system GMM that could account biases associated with endogeneity of explanatory variables and problems induced by unobserved country specific characteristics. I used both net barter terms of trade and income terms of trade as a measure of terms of trade for the entire analysis of this paper. Using data from 1985 to 2010, I found that the net barter terms of trade and income terms of trade growth has positive and significant effect on economic growth. Furthermore, the result proved that volatility of net barter terms of trade and income terms of trade have negative and significant effect on economic growth. Finally, this result is found to be robust using alternative volatility measures.

There is a major downward bias in the trend of most existing estimates of the peri-­‐‑ phery’s nineteenth-­‐‑century terms of trade. By using prices from the North Atlantic core as proxies for prices in the peripheral countries themselves, historians ignore the dramatic price convergence that took place during the nineteenth century. This has been reflected in Jeffrey Williamson’s recent work. Measured correctly, the per-­‐‑ iphery’s nineteenth-­‐‑century terms-­‐‑of-­‐‑trade boom would appear considerably longer, greater, and more widespread than Williamson has suggested. His grand narrative about the relation between globalisation and the ‘great divergence’ would therefore be greatly reinforced. Many of the details of his narrative would, however,  need  to  be  revised.  This  is  illustrated  by  the  case  of  India.

Empirical investigations of terms of trade have principally focused on commodity terms of trade and whether there is evidence of secular decline in accordance with the Prebisch-Singer hypothesis (Powell, 1991, Leon & Soto, 1997, Sappsford, 1985, 1988, Bleaney & Greenaway, 1993) or they have used cross section studies to investigate the link between the CTT and country growth (Auty & Mikesell, 2000, Ranis, 1991, Sachs & Warner, 1995, 1997, Gylfasson (2000 ), Gylfasson & Zoega (1997). Investigating the impact of shocks on economic performance requires an account of country-specific effects and a recognition that if windfalls have short-run impacts on expenditure and growth, these will be particularly important where there is growth feedback and hence path dependence

Underlying this view is the assumption that the set of commodities produced in the global economy and the number of product varieties traded internationally are given and time-invariant. When such assumptions are relaxed, as in Krugman (1989), the tenet that rapidly growing countries must experience a deterioration of their terms of trade becomes questionable. The argument is that countries can change the attributes of their products: product diversi…cation can reduce or prevent altogether the fall in their observed relative prices. Moreover, with an endogenous set of products, the international spillovers of pro- ductivity gains are not exclusively driven by relative price movements. The country’s trade partners are hurt by higher import prices, but also bene…t from the availability of more varieties of goods.

analytical example how such compositional issues relate to cross-country differences in demand. In a multigood world in which countries have different preferences, a change in the time profile of consumption af- fects not only the interest rate but also the relative prices of consump- tion goods in each given period. This is an effect familiar from the lit- erature on the transfer problem, which goes back to the debate between Keynes ð 1929 Þ and Ohlin ð 1929 Þ . In our context this means that by dis- torting its consumers’ decision to allocate spending between different periods, a country also affects its static terms of trade. Even if all static trade distortions are banned by a free-trade agreement, our analysis demonstrates that, away from the steady state, intratemporal prices may not be at their undistorted levels if capital controls are allowed.

Prebisch (1964) argues that developing economies can prevent their terms of trade from deteriorating over time by diversifying their exports into manufac- tured products. The success in export diversification widely vary across devel- oping economies. This is evident from the fact that the group of developing economies has substantial heterogeneity in the structure of their exports. For example, commodities accounted for more than two thirds of merchandise ex- ports in the overwhelming majority of the least developed countries between 2013-2015, as noted in UNCTAD (2016). In contrast, in the same period, 90 percent of total exports in Poland was manufactured exports, and more than 50 percent of which was medium- and high-tech manufactured exports. This substantial heterogeneity in the structure of exports brings about the question of whether an unexpected improvement in productivity causes notable heteroge-

cointegrated? The answer to this question is instrumental in specifying the panel VAR model discussed in section 2.2. Indeed, when a linear combination of the series is stationary, the level specification must be preferred since a panel VAR in differences is not consistent with a cointegrated system, as shown by Hamilton (1994). Before explaining how we test for cointegration, it is useful to review two well-known economic models related to the terms of trade determination: the Balassa-Samuelson model and the Prebisch-Singer model. In the Balassa-Samuelson model, the terms of trade between any two countries are mainly determined by productivity differences in traded sectors and productivity increases are associated with a certain fall in export prices. The Prebisch-Singer model argues that apart from productivity differences, the good and labor market structures also play a key role in the determination of the terms of trade. Indeed, the effect that productivity increases have on export prices is more unfavorable in economies with more competitive good and labor markets. Can gdp i,t ,

To begin, the paper explains why the terms of trade were depressed in the late colonial period and why they improved following independence. Initially, it is argued, the boom began due to the end of the Spanish trade monopoly, then it continued thanks to technological change, both in the core’s industry and in shipping. The paper then provides an indication of how much Argentina’s terms of trade improved up to the First World War. The paper concludes by dis-­‐‑ cussing the implications of this finding for Argentina’s historiography. It argues that the extent of the terms-­‐‑of-­‐‑trade boom means that less weight should be given to internal factors than to the impact of globalisation when explaining the origins of Argentina’s export-­‐‑led growth. Improved terms of trade led to labour and capital moving into the export sector, allowing the previously under-­‐‑util-­‐‑ ised Pampean land to be brought into production. Notably, Halperín Donghi himself arrived at a similar conclusion in his later work, when he returned to one of the original metanarratives of Argentina’s historiography, in which the country’s expansion is seen as a result of the trade liberalisation that accompan-­‐‑ ied independence. 19 Indeed, Halperín Donghi explicitly identified improved

In this paper, I specify terms-of-trade as a new factor that previous studies have not paid enough attention to, based on the framework developed by Shambaugh and Kevin (2010). I use a set of data including 91 countries, from 1980 to 2007 to operate both OLS and logistic regression. The results show evidence that there is a negative connection between the positive shocks on terms-of-trade and the likelihood on choosing fixed exchange rate regime and vice versa.

Key findings of the study pointed out that depreciation of domestic currency and deterioration in terms of trade are significant factors responsible for foreign indebtedness in Pakistan. The study found positive relationship between foreign debt and fiscal deficit as expected but insignificant coefficient apparently indicates that no valid conclusion can be drawn regarding the relationship between foreign debt and fiscal deficit in the context of Pakistan economy. In short-run none of the variables has established relationship with foreign debt. VECM results show significant long-run causality among the variables. Toda Yamamoto causality test has identified three significant uni-directional causalities. Diagnostic test revealed absence of serial correlation, heteroskedasticity and non-normality. Stability of the proposed model was also confirmed by CUSUM and CUSUMSQ.

Open economy macroeconomic dynamics and their implications after liberalization and globalization initiated during the 90s on terms of trade generated very important dimensions in the Balance of Payments for India as we started viewing the importance of external economic scenario not only for export promoting activities but also prominently for capital and financial flows. The movements in and behaviour of various measures of terms of trade have become increasingly complex given the diversities that exist at both economy and firm levels. This study thus aims to critically analyze the dynamic behavioural movements and trends in the various measures of terms of trade for understanding the consequences of open economy macroeconomic process. The study is conducted for the period 1991-92 up to 2016-17 for critical analysis as this phase can be seen as a period of high growth and considerable variability in terms of trade as consequences of what happened in the domestic economy and rest of the world after the liberalization process was initiated. Instability and variability noticed in both aggregated levels of exports and imports as well as in various commodity groups indicate the vulnerability of Balance of Payments to external shocks. Therefore, this study strongly suggests that variability in exports and imports are to be reduced for smooth, consistent and sustainable growth of external balance.

Importantly, the recursive-preferences model variants with a predetermined consumption wage rate predict that a Home productivity increase triggers a strong initial rise in Foreign hours worked and GDP (Table 3, Panels (b2),(b4), Cols. (2) and (8)). With high risk aversion γ=50, a one-standard deviation innovation to Home productivity raises Home and Foreign GDP by about 1.2% and 0.2%, respectively, on impact, under both KPR and GHH period utility. Intuitively, the sizable Foreign terms of trade improvement under recursive preferences boosts Foreign labor demand more strongly when the consumption wage rate cannot adjust, on impact. (By contrast, with wage

In the literature on trade and development, a very large numbers of empirical studies have pointed out that developing countries are much more vulnerable to external terms-of- trade (TOT) shocks vis-à-vis the developed nations. These fluctuations are undesirable because they contribute to significantly increased volatility in the growth of output and hence social welfare. Studies e.g. Baxter and Kouparitsas (2006), Broda (2004), Mendoza (1995) and Kose (2002) have found that TOT fluctuations are twice as large in developing countries as in developed nations. According to them the nature of composition of export baskets, high degree of trade openness and very little influence over international commodity prices have been the main responsible factors.

In this essay we model endogenous terms of trade and economic growth in order to analyze the optimal en- vironmental policy that maximizes social welfare. To accomplish this, we work with an AK model of eco- nomic growth and deduce endogenous terms of trade from the price of an aggregate consumption good. Thus, as long as households derive utility from consumption and the environment and pollution is generated through domestic production, we conclude that the optimal policy consists in a pollution tax on production.

(primary products) in developing countries are deterio- rating in the long run. Singer (1950) also draws the same conclusion, which is so-called “Prebisch-Singer hypothe- sis”. Bhagwati (1958) proposes the “immiserizing growth” theory based on the “Prebisch-Singer hypothesis”, point- ing out that developing countries economic growth lay particular stress on export, and the increase in production and gains may be offset by the worsening terms of trade, leading to absolute decline of domestic residents’ income standard and actual consumption standard [1]. Krugman (1989) argues that rapid developing country does not necessarily experience a deteriorating terms of trade process, and they can avoid the drop of relative prices through commodity diversification [2]. Studies con- ducted by Kehoe & Ruhl (2008) show that terms of trade do have an impact on a country’s actual income and consumption standard. The improvement of terms of trade has a negative effect on the purchasing power of a country, which may reduce consumption and welfare level [3].

The omission of feasible transmission channels of terms of trade shocks, such as the real exchange rate, the degree of openness or the GDP per capita, could be explaining the variance decomposition estimated in the study. In fact, there are other factors that explain terms of trade fluctuations that must be affecting the relationship between the terms of trade and current account, as Galor and Lin (1994) claim: “(...) a comprehensive discussion of current account dynamics should be based on changes in the fundamentals of the world economy that lead to changes in the relative prices, rather than on changes in endogenous variables.” However, the results display relevant features for the relationship between the terms of trade and the current account for the peruvian economy and they might be taken into account in the design of policies aimed to preserve macroeconomic stability.

Recent empirical studies by Caballero (2003), Caballero and Panageas (2003) and by Calvo, Izquierdo and Mejia (2004) also find that a fall in commodity prices increases the likelihood of a Sudden Stop in capital flows, an event which is accompanied by large interest rate upswings. They point out the recent episode of the Russian crises of August 1998, in which emerging market economies such as Argentina, Chile, Colombia, Ecuador, Korea and Peru all suffered from sudden stops in capital flows and an increase in country risk premia. Table 1 and figure 5 show a strong positive comovement in terms of trade for many latin american countries over the last decade. This may suggest that terms of trade movements in the region might play a role in explaining the positive comovement of interest rate spreads, a feature claimed in some of these empirical studies.