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North-South terms of trade: an empirical investigation

  • Michael A. Kouparitsas

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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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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  1. Reinhart, Carmen & Borensztein, Eduardo, 1994. "The Macroeconomic Determinants of Commodity Prices," MPRA Paper 6979, University Library of Munich, Germany.
  2. 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.
  3. Rogers, J.H. & Jenkins, M.A., 1993. "Haircuts or Hysteresis? Sources of Movements in Real Exchange Rates," Papers 4-93-6, Pennsylvania State - Department of Economics.
  4. Engel, Charles, 1993. "Real exchange rates and relative prices : An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 32(1), pages 35-50, August.
  5. 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.
  6. Michael A. Kouparitsas, 1996. "North-South business cycles," Working Paper Series, Macroeconomic Issues WP-96-9, Federal Reserve Bank of Chicago.
  7. 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.
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