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Inequality in Exchange: The Use of a World Trade Flow Table for Analyzing the International Economy

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  • Utz-Peter Reich

Abstract

Whether or not the terms of trade between two countries may be unequal is a controversial question in the theory of international economics. In practice, the issue is resolved through statistical observation of the terms of trade. This measurement of the terms of trade follows a long tradition and produces impressive detail. It is, however, restricted in scope, because the first derivative, the change of the terms over time is observed only. Absolute levels depend on which year is chosen as the base year, a choice that is rather arbitrary and carries no theoretical meaning. Equality in the levels of terms of trade remains thus undefined. More precisely, it is always assumed to exist implicitly for whichever base year is being nominated. The paper proposes an answer to this ambiguity based on the relatively new statistical tool of international purchasing power compilation. The terms of trade are crucially dependent on the rate of foreign exchange (for which exports are traded against imports), which is predominantly governed by financial rather than commodity markets. Hence, the paper proposes to separate the two factors of influence and to call terms of trade 'equal' if the effective real exchange rate (as derived from the nominal exchange rate by means of purchasing power parities) equals one. On that basis a world trade flow table is constructed, putting the compiled equalities and inequalities in trade into a coherent, global perspective.

Suggested Citation

  • Utz-Peter Reich, 2007. "Inequality in Exchange: The Use of a World Trade Flow Table for Analyzing the International Economy," Economic Systems Research, Taylor & Francis Journals, vol. 19(4), pages 375-395.
    • Handle: RePEc:taf:ecsysr:v:19:y:2007:i:4:p:375-395
    DOI: 10.1080/09535310701698449
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    References listed on IDEAS

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    1. Utz-Peter Reich, 2001. "National Accounts and Economic value," Palgrave Macmillan Books, Palgrave Macmillan, number 978-0-230-51290-0, September.
    2. Prebisch, Raúl, 1950. "The economic development of Latin America and its principal problems," Sede de la CEPAL en Santiago (Estudios e Investigaciones) 29973, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
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    Cited by:

    1. Andrea Ricci, 2016. "Unequal Exchange in International Trade:A General Model," Working Papers 1605, University of Urbino Carlo Bo, Department of Economics, Society & Politics - Scientific Committee - L. Stefanini & G. Travaglini, revised 2016.
    2. Maciej Grodzicki, 2018. "Prices of Value Added and Competitiveness in Global Value Chains," SPRU Working Paper Series 2018-14, SPRU - Science Policy Research Unit, University of Sussex Business School.

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