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What Can Account for Fluctuations in the Terms of Trade?


  • Marianne Baxter

    () (Institute for Economic Development, Boston University)

  • Michael A. Kouparitsas

    (Federal Reserve Bank of Chicago)


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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Suggested Citation

  • Marianne Baxter & Michael A. Kouparitsas, 2000. "What Can Account for Fluctuations in the Terms of Trade?," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-112, Boston University - Department of Economics.
  • Handle: RePEc:bos:iedwpr:dp-112

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    References listed on IDEAS

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    Cited by:

    1. Michael A. Kouparitsas, 2001. "Evidence of the North--South business cycle," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q I, pages 46-59.
    2. Paulo Soares Esteves & Fátima Cardoso, 2008. "Globalisation, Structural Changes in Exports and the Portuguese Terms of Trade," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
    3. Abdur R. Chowdhury, 2003. "Do asymmetric terms of trade shocks affect private savings in a transition economy?," Macroeconomics 0303006, EconWPA.
    4. Malik, Adeel & Temple, Jonathan R.W., 2009. "The geography of output volatility," Journal of Development Economics, Elsevier, vol. 90(2), pages 163-178, November.
    5. Abdur R Chowdhury, 2004. "Private Savings in Transition Economies: Are there Terms of Trade Shocks?," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 46(4), pages 487-514, December.
    6. Magali Dauvin, 2014. "Energy prices and the real exchange rate of commodity-exporting countries," International Economics, CEPII research center, issue 137, pages 52-72.
    7. Bems, Rudolfs & de Carvalho Filho, Irineu, 2011. "The current account and precautionary savings for exporters of exhaustible resources," Journal of International Economics, Elsevier, vol. 84(1), pages 48-64, May.
    8. Chaudhuri, Sarbajit & Biswas, Anindya, 2016. "Endogenous labour market imperfection, foreign direct investment and external terms-of-trade shocks in a developing economy," Economic Modelling, Elsevier, vol. 59(C), pages 416-424.
    9. Konstantin M. Wacker, 2011. "The Impact of Foreign Direct Investment on Developing Countries’ Terms of Trade," WIDER Working Paper Series 006, World Institute for Development Economic Research (UNU-WIDER).
    10. Chowdhury, Abdur, 2015. "Terms of trade shocks and private savings in the developing countries," Journal of Comparative Economics, Elsevier, vol. 43(4), pages 1122-1134.
    11. Chaudhuri, Sarbajit, 2014. "Do Developing Countries Possess any Built-in Mechanism that Copes with External Terms-of-trade Shocks?," MPRA Paper 57736, University Library of Munich, Germany.
    12. Josef Loening & Masato Higashi, 2011. "Decomposing terms of trade fluctuations in Ethiopia," Applied Economics Letters, Taylor & Francis Journals, vol. 18(13), pages 1219-1224.
    13. Dauvin, Magali & Guerreiro, David, 2017. "The Paradox of Plenty: A Meta-Analysis," World Development, Elsevier, vol. 94(C), pages 212-231.
    14. Christopher Bowdler & Adeel Malik, 2005. "Openness and inflaton volatility: Cross-country evidence," Economics Series Working Papers 2005-W14, University of Oxford, Department of Economics.
    15. Chowdhury, Abdur R., 2003. "Do asymmetric terms of trade shocks affect private savings in a transition economy?," BOFIT Discussion Papers 3/2003, Bank of Finland, Institute for Economies in Transition.
    16. Margaret S. McMillan & Alix Peterson Zwane & Nava Ashraf, 2007. "My Policies or Yours: Does OECD Support for Agriculture Increase Poverty in Developing Countries?," NBER Chapters,in: Globalization and Poverty, pages 183-240 National Bureau of Economic Research, Inc.
    17. Chaudhuri, Sarbajit, 2015. "Endogenous Labour Market Imperfections, FDI and External Terms-of-Trade Shocks in a Developing Economy," MPRA Paper 61594, University Library of Munich, Germany.
    18. Calderón, César & Kubota, Megumi, 2018. "Does higher openness cause more real exchange rate volatility?," Journal of International Economics, Elsevier, vol. 110(C), pages 176-204.
    19. Konstantin M. Wacker, 2011. "Do multinationals beat down developing countries' export prices? The impact of FDI on net barter terms of trade," Ibero America Institute for Econ. Research (IAI) Discussion Papers 211, Ibero-America Institute for Economic Research.
    20. Hakon Tretvoll & Fernando Leibovici & David Kohn, 2017. "Trade in Commodities and Emerging Market Business Cycles," 2017 Meeting Papers 743, Society for Economic Dynamics.
    21. Habib, Maurizio Michael & Kalamova, Margarita Manolova, 2007. "Are there oil currencies? The real exchange rate of oil exporting countries," Working Paper Series 839, European Central Bank.
    22. Christopher Bowdler & Adeel Malik, 2005. "Openness and inflation volatility: Cross-country evidence," Economics Papers 2005-W14, Economics Group, Nuffield College, University of Oxford.
    23. Chaudhuri, Sarbajit & Biswas, Anindya, 2014. "External terms-of-trade and labor market imperfections in developing countries: theory and evidence," MPRA Paper 59193, University Library of Munich, Germany.
    24. Fátima Cardoso & Paulo Soares Esteves, 2008. "What is behind the recent evolution of Portuguese terms of trade?," Working Papers w200805, Banco de Portugal, Economics and Research Department.
    25. Irineu E de Carvalho Filho & Rudolfs Bems, 2009. "Exchange Rate Assessments; Methodologies for Oil Exporting Countries," IMF Working Papers 09/281, International Monetary Fund.

    More about this item


    Terms of Trade; International business cycles;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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