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North-South terms of trade: an empirical investigation

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  • Michael A. Kouparitsas

Abstract

My empirical analysis a reveals a strong link between the terms of trade of industrial and developing countries. I show that the terms of trade developing countries are essentially the relative prices of commodity exports and manufactured imports. Similarly, I find that terms of trade fluctuations of industrial countries are heavily influenced by movements in the relative price of manufactured exports and commodity imports. This means that improvements in the terms of trade of developing countries imply a worsening in the terms of trade of developing industrial countries, and vice versa. One example of this is the explosion of oil prices in the early 1970s. The terms of trade industrial countries worsened considerably, while the terms of trade of oil exporting countries improved dramatically. This episode led to a sizeable loss of income for industrial countries (of around 3 percent) and a sizeable gain in real income for oil exporting countries (of roughly 80 percent).

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Bibliographic Info

Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series, Macroeconomic Issues with number WP-97-05.

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Date of creation: 1997
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Handle: RePEc:fip:fedhma:wp-97-05

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Related research

Keywords: Prices ; Business cycles ; International trade;

References

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  1. Cuddington, John T & Urzua, Carlos M, 1989. "Trends and Cycles in the Net Barter Terms of Trade: A New Approach," Economic Journal, Royal Economic Society, vol. 99(396), pages 426-42, June.
  2. Engel, Charles, 1993. "Real exchange rates and relative prices : An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 32(1), pages 35-50, August.
  3. Reinhart, Carmen & Borensztein, Eduardo, 1994. "The Macroeconomic Determinants of Commodity Prices," MPRA Paper 6979, University Library of Munich, Germany.
  4. Bleaney, Michael F & Greenaway, David, 1993. "Long-Run Trends in the Relative Price of Primary Commodities and in the Terms of Trade of Developing Countries," Oxford Economic Papers, Oxford University Press, vol. 45(3), pages 349-63, July.
  5. Rogers, John H. & Jenkins, Michael, 1995. "Haircuts or hysteresis? Sources of movements in real exchange rates," Journal of International Economics, Elsevier, vol. 38(3-4), pages 339-360, May.
  6. Sapsford, David, 1990. "Primary Commodity Prices and the Terms of Trade," The Economic Record, The Economic Society of Australia, vol. 66(195), pages 342-56, December.
  7. Michael A. Kouparitsas, 1996. "North-South business cycles," Working Paper Series, Macroeconomic Issues WP-96-9, Federal Reserve Bank of Chicago.
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Cited by:
  1. M. Ayhan Kose & Raymond Riezman, 1999. "Trade Shocks and Macroeconomic Fluctuations in Africa," CSGR Working papers series 43/99, Centre for the Study of Globalisation and Regionalisation (CSGR), University of Warwick.
  2. Martin Berka & Mario J Crucini & Chih-Wei Wang, 2011. "International risk sharing and commodity prices," CAMA Working Papers 2011-34, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  3. Agenor, Pierre-Richard & McDermott, C John & Prasad, Eswar S, 2000. "Macroeconomic Fluctuations in Developing Countries: Some Stylized Facts," World Bank Economic Review, World Bank Group, vol. 14(2), pages 251-85, May.
  4. David K. Backus & Mario J. Crucini, 1998. "Oil Prices and the Terms of Trade," NBER Working Papers 6697, National Bureau of Economic Research, Inc.
  5. Mario Crucini & Prasad Bidarkota, 1997. "Commodity Prices and the Terms of Trade," Working Papers 98-01, Ohio State University, Department of Economics.
  6. Péter Benczúr & Attila Rátfai, 2005. "Economic Fluctuations in Central and Eastern Europe - the Facts," MNB Working Papers 2005/02, Magyar Nemzeti Bank (the central bank of Hungary).
  7. Kose, M. Ayhan, 2002. "Explaining business cycles in small open economies: 'How much do world prices matter?'," Journal of International Economics, Elsevier, vol. 56(2), pages 299-327, March.
  8. Michael A. Kouparitsas, 1996. "North-South business cycles," Working Paper Series, Macroeconomic Issues WP-96-9, Federal Reserve Bank of Chicago.

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