The Consumption Terms of Trade and Commodity Prices
Movements in a nation's terms of trade are widely viewed as important for the understanding the sources of business cycle fluctuations, the dynamics of the trade balance and economic welfare. Backus, Kehoe and Kydland (1994) emphasize the role of productivity movements in a two-country, two-good setting. In their model an increase in domestic productivity expands out- put at home relative to output abroad and the terms of trade deteriorates. Put differently: a large country expanding the supply of the traded good it produces must (in equilibrium) drive down the relative price of its prod- ucts on world markets. The importing country's terms of trade improves, a positive spillover. Backus and Crucini (2000) add a third region to this model; a region that specializes in oil production. When the oil region cuts back production, the relative price of oil rises, a terms of trade improvement for oil producers. Output falls in the oil importing regions because oil is an intermediate input into production of the two manufactured goods produced in those regions. The business cycle implications of this model are consis- tent with empirical work by Hamilton (1983) showing oil price increases in advance of U.S. recessions. Mendoza (1995) studies the terms of trade and business cycles in an extensive cross-country panel using a partial equilibrium business cycle model where terms of trade movements are exogenous. In his theoretical setting, terms of trade shocks are analogous to lotteries with the sign and magnitude of the payout dependent upon a country's pattern of specialization across an array of internationally traded goods.
|Date of creation:||Sep 2010|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +61 2 6125 4705
Fax: +61 2 6125 5448
Web page: http://cama.crawford.anu.edu.au
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- David Backus & Patrick J. Kehoe & Finn E. Kydland, 1992.
"Dynamics of the Trade Balance and the Terms of Trade: The S-Curve,"
NBER Working Papers
4242, National Bureau of Economic Research, Inc.
- 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.
- David Backus & Patrick Kehoe & Finn E. Kydland, 1992. "DOS executable for "Dynamics of the Trade Balance and the Terms of Trade: The J-Curve?"," QM&RBC Codes 5, Quantitative Macroeconomics & Real Business Cycles.
- David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1992. "Dynamics of the trade balance and the terms of trade: the S-curve," Working Paper 9211, Federal Reserve Bank of Cleveland.
- David Backus & Patrick Kehoe & Finn E. Kydland, 1992. "Web interface for "Dynamics of the Trade Balance and the Terms of Trade: The J-Curve?"," QM&RBC Codes 5a, Quantitative Macroeconomics & Real Business Cycles.
- Yael S. Hadass & Jeffrey G. Williamson, 2001.
"Terms of Trade Shocks and Economic Performance 1870-1940: Prebisch and Singer Revisited,"
NBER Working Papers
8188, National Bureau of Economic Research, Inc.
- Hadass, Yael S & Williamson, Jeffrey G, 2003. "Terms-of-Trade Shocks and Economic Performance, 1870-1940: Prebisch and Singer Revisited," Economic Development and Cultural Change, University of Chicago Press, vol. 51(3), pages 629-56, April.
- Backus, David K. & Crucini, Mario J., 2000.
"Oil prices and the terms of trade,"
Journal of International Economics,
Elsevier, vol. 50(1), pages 185-213, February.
- Hamilton, James D, 1983. "Oil and the Macroeconomy since World War II," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 228-48, April.
- Mendoza, Enrique G, 1995. "The Terms of Trade, the Real Exchange Rate, and Economic Fluctuations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(1), pages 101-37, February.
- Rogers, John H., 2007. "Monetary union, price level convergence, and inflation: How close is Europe to the USA?," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 785-796, April.
- Jeffrey Frankel & David Parsley & Shang-Jin Wei, 2012.
"Slow Pass-through Around the World: A New Import for Developing Countries?,"
Open Economies Review,
Springer, vol. 23(2), pages 213-251, April.
- Frankel, Jeffrey & Parsley, David & Wei, Shang-Jin, 2005. "Slow Passthrough Around the World: A New Import for Developing Countries?," Working Paper Series rwp05-016, Harvard University, John F. Kennedy School of Government.
- Frankel, Jeffrey A. & Wei, Shang-jin & Parsley, David, 2012. "Slow Pass-through Around the World: A New Import for Developing Countries?," Scholarly Articles 10494212, Harvard Kennedy School of Government.
- Jeffrey A. Frankel & David C. Parsley & Shang-Jin Wei, 2005. "Slow Passthrough Around the World: A New Import for Developing Countries?," NBER Working Papers 11199, National Bureau of Economic Research, Inc.
When requesting a correction, please mention this item's handle: RePEc:een:camaaa:2010-27. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Cama Admin)
If references are entirely missing, you can add them using this form.