Prices and Terms of Trade for Developed Country Exports of Manufactured Goods

The subject of the terms of trade between manufactured goods and primary products has a long history, and opinions on the direction of trends in them have gone through several cycles. Recently, and until the last few years, the majority opinion, especially in developing countries and in agencies representing their views, has been that manufactured goods have generally risen in price over the past century or so. This was true, despite the fact that such a rise would have violently contradicted one of the most firmly held and basic beliefs of classical economics. That was that as a consequence of diminishing returns-of rising population pressing against a constant supply of resources, especially land—there must in the long run be a rise in primary goods prices, especially agricultural prices, relative to the prices of manufactured goods. For example: The tendency, then, being to a perpetual increase in the productive power of labour in manufactures, while in agriculture and mining there is a conflict between two tendencies, the one towards an increase of productive power, the other towards a diminution of it, the cost of production being lessened by every improvement in the processes, and augmented by every addition to population; it follows that the exchange value of manufactured articles, compared with the products of agriculture and of mines, have, as population and industry advance, a certain and decided tendency to fall. (Mill, 1848, Book IV, Ch. II).