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What Can Account for Fluctuations in the Terms of Trade?

  • Marianne Baxter
  • Michael A. Kouparitsas

This paper studies the sources of terms of trade volatility. We decompose the terms of trade into two components. The 'goods price' component stems from differences in the composition of import and export baskets, while the 'country price' component stems from deviations from the law of one price. Countries are classified according to their major import and export goods: commodities, manufactured goods and fuels. Except fuel exporters, there is roughly equal importance of goods price vs country price volatility. These results suggest that there may be a role for reducing terms of trade volatility through diversification of a country's exports. Copyright 2006 Blackwell Publishing Ltd.

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Article provided by Wiley Blackwell in its journal International Finance.

Volume (Year): 9 (2006)
Issue (Month): 1 (05)
Pages: 63-86

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Handle: RePEc:bla:intfin:v:9:y:2006:i:1:p:63-86
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  1. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1994. "Dynamics of the Trade Balance and the Terms of Trade: The J-Curve?," American Economic Review, American Economic Association, vol. 84(1), pages 84-103, March.
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