Free Economics Dissertations - It Must Be Noted That The Commodity Terms Of Trade Tend To Deteriorate For A
It must be noted that the commodity terms of trade tend to deteriorate for a country if Px/ Pm falls, that is export prices decline relative to import prices, even though both may rise. Historically the prices of primary commodities have declined relative to manufactured goods. As a result, the terms of trade have on the average tended to worsen over time for the non-oil exporting developing countries while showing a relative improvement for the developed countries. Empirical studies suggest that real primary-product prices have declined at an average annual rate of 0.6% since 1900. It is important to highlight here that the total value of export earnings depends not only on the volume of these exports sold abroad but also on the price paid for them. If export prices decline, a greater volume of exports will have to be sold merely to keep total earnings constant.
Prebisch and Singer (1950) challenged the notion that a developing country’s barter terms of trade would increase due to relatively rapidity of technological progress in the industry which would push down the relative prices of the manufacturers exported by the high-income economies. They believed that it would be the developing country’s terms of trade that would decline due to a number of reasons, namely
Many of their exported products would serve as inputs into the production of imported manufacturers. Thus a fall in the price of a commodity would have different implications for the producer and the purchaser.
As per Engel’s law, the income-elasticity of demand for the products produced by low-income economies would rise less than that for products embodying higher technology.
The price for primary products would be less price sensitive, thus an increase in the demand for output of low-income country exports would only come from a large disproportionate fall in prices.
They output for low income countries would be subject to a greater squeeze on prices and margins as primary products were subject to low barriers to entry.
It must be noted that this focus on the commodities-manufactures terms of trade has been the subject of extensive debate. It is now widely accepted that for most part of the twentieth century, the barter terms of trade did indeed run against commodities, and they were more in favour of manufacture’s.
Conclusion
In summary it can be said that international trade has led to economic growth and development however, it has not been at the same pace for developing and developed nations alike. Advancement in technology has enabled developed nations to benefit from it, however, LDCs have not gained much advantage, and instead it has adversely affected their terms of trade.
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