A General Test of the Prebisch–Singer Hypothesis

Abstract

This paper examines jointly the Prebisch–Singer hypothesis of a long‐term decline in the relative price of primary commodities and the appropriate framework in which it is tested. A general model is estimated which nests the univariate and bivariate time‐series models used in the past literature. The results suggest that the econometric models estimated in the majority of previous studies were misspecified. The evidence strongly supports the Prebisch–Singer hypothesis and rejects recent findings—that the terms of trade are characterized by infrequent negative shocks—in favor of a long‐term negative trend.