Accounting for development

To assess proposed macroeconomic adjustment programs, policymakers must estimate import demand relative to the foreign exchange available. Traditional models estimate import demand as a function of relative prices (the real exchange rate) and income (gross domestic product) but omit changes in foreign exchange. In the 1980s, however, declines in foreign lending and the terms of trade and increased debt service costs reduced foreign exchange availability in most developing countries and limited import capacity. In this article two import models are presented which incorporate both the traditional variables and indicators of import capacity—foreign exchange inflows and international reserves. The first model assumes that import prices are exogenous, but in the second model import prices are endogenous—allowing for government attempts to reduce import demand by increasing the domestic import price. The models are estimated using data for twenty-one developing countries for 1970–83. The results suggest that the import model presented here does a better job of explaining import behavior than do the traditional model (which excludes changes in foreign exchange) and the Hemphill model (which excludes relative import prices and income).

The dollar and the U.S. terms of trade

Indonesia does not have a processing unit for bauxite. As a result all raw materials are exported. In contrast, the alumina is imported to fulfill the domestic need for aluminum industry. In terms of evaluating bauxite export, term of trade (TOT) analysis was conducted. Method used to calculate the TOT is carried out using net barter of TOT formula. The parameter include the export price compared to the import one. If the bauxite price increases and the import price decreases, the TOT is surplus. Contrarily, if the export price decreases and the import price increases, the TOT is deficit. To calculate the ratio of the export volume against the import volume used the grass barter of TOT. The measured parameter is the export volume compared to the import one. If the export volume increases and the import decreases, the TOT is surplus. On the other hand, if the export volume decreases and the import volume increases, the TOT is deficit. In 2003, the net barter of TOT was 0.07 and the grass barter of TOT was 87,874, but in 2010, the net barter of TOT was 0.09 and the grass barter of TOT was 5,809.53. Results of the TOT values indicate that Indonesia was still the exporter of bauxite raw material with an average of export value was lower than that of the import one, although its volume was significant due to the very low price. Indonesian bauxite export value will increase, if the processing unit immediately established

I explore how the concept of “the terms of trade” has been used since it was coined by Marshall. Early writers (Taussig, Viner, Dorrance) constructed variations on the relative price of traded goods that Marshall was concerned with, but most of these variations have been left behind in modern uses of the term, which today almost always refer to a relative price of exports and imports. However, when authors have wanted to identify the terms of trade with a particular country and to represent it either symbolically in an economic model or empirically, they have had to choose between defining the terms of trade as the relative price of exports or the relative price of imports. The first to do this was Taussig, who chose the second option, but he was followed by Viner who chose the first, and was followed in this choice by almost all writers for the next several decades. Then, around 1980, Taussig’s choice came back into fashion among scholars of international finance. I document this contrast in definitions between international trade and international finance, then add slightly to Viner’s argument for preferring that the terms of trade of a country be defined as the relative price of its exports.

First, in order to proceed we must define the “Terms of Trade”. Terms of trade is a relationship between the prices of exports and the prices of imports, it’s mathematical expression is as follows: Px/Pm. Second, we assume there are two countries trading with each other, USA and China with US dollar and Chinese Yuan monies. Further, the terms of trade for both of these countries are as follows: USA’s Terms of Trade: PXus/PMus and China’s Terms of Trade: PXch/PMch. Now, lets investigate three different outcomes for exchange rate (in trade account framework) by this approach: A - Primary Equlibrium Status: In this case the terms of trade of the two countries are in equilibrium, here: we assume the two monies are equal in value for simplicity, so we could have the following equations: PXus/PMus = PXch/PMch ------------- Dus = Uch or DUSe = UCHe. As it is clear from the equation, there is an equilibrium and we have no change at all. B - Increasing of the US terms of trade: The increase in terms of trade for US causes the increase in price of US exports (the price for US imports is constant) which in turn decreases the demand for DUS and devalues the DUS, other things being held constant. So we could have: PXus/PMus UCH. The converse would happen to China’s terms. C - Decreasing of the US terms of trade: The decrease in terms of trade for US causes the decrease in price of US exports (the price for US imports is constant) which in turn increases the demand for DUS and upvalues the DUS, other things being held constant. So we could have: PXus/PMus > PXch/PMch ------------- DUS> UCH. The converse would happen to China’s terms.

This article makes a unique contribution to the literature with reference to China, being a pioneering attempt to investigate the effect of terms of trade and its volatility on economic growth of China by using annual time series data from 1980 to 2010 and by applying rigorous econometric techniques. Autoregressive distributed lag (ARDL) cointegration and Johansen and Juselius cointegration methods suggest the significant negative long-run relationship of terms of trade and volatility of terms of trade with economic growth. Four different sensitivity analyses indicate that initial results are robust. Rolling window analysis was performed to find the yearly effect of terms of trade and its volatility on the economic growth of China. Results show that the coefficient of terms of trade on economic growth remains negative from 1985 to 1988, 1994 to 1995, 1998 to 2002, and from 2006 to 2008. Variance decomposition method shows a unidirectional causal relationship between terms of trade and economic growth runs from terms of trade to economic growth and a bidirectional causal relationship between volatility of terms of trade and economic growth in China. It is concluded that less volatile terms of trade are better for economic growth. Policy makers should critically analyze the reasons for deterioration of terms of trade in the years 1985 to 1988, 1994 to 1995, 1998 to 2002 and from 2006 to 2008. Either this happened because of increases in import prices or decreases in export prices, or increases in export prices that are less than increases in import prices. This analysis will be beneficial in finding the contents of export and import by which terms of trade deteriorate and form growth-enhancing policies.

This paper studies the endogenous determination of pricing to market, in a model with time dependent transportation costs, where the future terms of trade are random. Allowing time dependent transportation costs adds a dimension of investment to the pre-buying of imports, implying that financial considerations determine the frequency of pricing to market, and the deviations from relative PPP. If the expected discounted cost of last minute delivery is higher than pre-buying, one exercises the option of spot market imports if the realized terms of trade are favorable enough. Pricing to market is observed in countries characterized by low terms of trade volatility and low financing costs. In these circumstances, imports are pre-bought, and the spot market for imports is inactive. In countries where the financing costs and the terms of trade volatility are high, few imports are pre-bought, the price of imports is determined by the realized real exchange rate, and a version of relative PPP holds. With an intermediate level of terms of trade volatility and of financing costs, a mixed regime is observed, and some imports are pre-bought. If the realized real exchange rate is favorable enough more imports are purchased in the spot market, the price of imports is determined by the realized real exchange rate, and the relative PPP holds. If the realized real exchange rate is weak, pricing to market would prevail, increasing consumers' welfare by shielding them from the adverse purchasing power consequences of weak terms of trade. Higher financing costs increase the cost of pre-buying imports, reducing thereby the frequency of pricing to market, increasing the expected relative price of imports, reducing the expected deviations from relative PPP, and reducing welfare.

Abstract. I explore how the concept of “the terms of trade” has been used since Alfred Marshall coined it. Early writers (Taussig, Viner, Dorrance) constructed variations on the relative price of traded goods that Marshall was concerned with, but most of these variations have been left behind in modern uses of the term, which today almost always refer to a relative price of exports and imports. However, when authors have wanted to identify the terms of trade with a particular country and to represent it either symbolically in an economic model or empirically, they have had to choose between defining the terms of trade as the relative price of exports or the relative price of imports. The first to do this was Taussig, who chose the second option, but he was followed by Viner who chose the first, and Viner was followed in this choice by almost all writers for the next several decades. Then, around 1980, Taussig’s choice came back into fashion among scholars of international finance. I document this contrast in definitions between international trade and international finance, then add slightly to Viner’s argument for preferring that the terms of trade of a country be defined as the relative price of its exports. Keywords. Terms of trade. JEL. F10.

The movement of intersectoral terms of trade in India is generally regarded as an issue of crucial importance in affecting patterns of growth and income distribution both in agriculture and in industry. While there is substantial (and often acrimonious) debate on the determinants of agriculture-industry terms of trade as well as their precise impact on economic welfare and the growth process, the significance of such movements tends to be taken for granted by all protagonists. In this paper a slightly different position is taken, in which intersectoral terms of trade are assigned a less important role in determining economic processes. Some of the arguments can be starkly presented as follows: In general the government in India has little power in determining such terms of trade, which emerge not because of the differential lobbying power of particular classes but because of the workings of political economic variables such as labour productivity in industry, the real wage and industrial mark-up and import prices. This view contests both 'urban bias' and 'rich farmer lobby' sets of theories. Secondly, it is argued that terms of trade movements (trends) in themselves have not affected either the real incomes of the rural poor or rates of agricultural investment and growth. Thirdly, it is suggested that the causes of industrial growth or stagnation are not to be found in such terms of trade movements, although the latter may affect the pattern of industrial demand and therefore the allocation of investment. These arguments and others are elaborated below. The first section describes the movement of agricultural-industry terms of trade since the early 1950s and isolates three major phases. Various explanations are considered, and a detailed consideration is made of the factors affecting terms of trade in the latest phase. In the second section the question of the impact on agriculture is taken up, in terms of how the rural poor as well as cultivators who are net sellers are affected. The

The Lerner paradox is the possibility that a tariff on an import good might worsen a country’s terms of trade, and the Metzler paradox is the possibility that a tariff on an import good might reduce a country’s import price. In a general equilibrium framework with multiple goods, this paper shows that the combination of the invertibility of the Slutsky matrix for the world economy and its similarity across countries will preclude both of the paradoxes, and that the combination of the gross-substitutes assumption for the world demand and the substitute assumption for the demand of an import country property of goods will preclude the Lerner paradox. A modified condition for the Slutsky matrix combined with the gross substitute for the world demand will do the same for the Metzler paradox. A concept of non-surpassed diagonal is used in deriving the result. Key Words: Lerner Metzler tariffs, terms of trade, gross substitutes, dominant diagonal matrix. JEL Codes: C20, F02, F11 I. Introduction The Lerner paradox and the Metzler paradox have appealed to the intellect of economists for a long time both in their theoretical curiosity as well as their practical policy signi cnace. The Lerner paradox (Abba Lerner, 1936) refers to the possibility that a tari¤ on an import good might worsen a country’s terms of trade. The Metzler paradox (Lloyd Metzler, 1949a) refers to the possibility that a tari¤ on an import good might reduce a country’s import price. 1 Metzler examined thoroughly the e¤ect of tari¤ on domestic relative price in a general setting, showed his paradox, and investigated what conditions might cause it. [I]f the world demand for the tari¤-imposing country’s exports is inelastic and if the tari¤s reduce the demand for imports in the tari¤-imposing country to a considerable extent, the fall in world prices of imports, relative to world prices of exports, may be so large that domestic prices of imports are relatively lower than before the tari¤s were imposed, even after the tari¤s are added to the world prices. (Metzler, 1949b, p.345) This paper shows that, if one starts from the state of no tari¤s in the world, the Metzler Paradox is precluded by two set of conditions: (1)the invertibility of the Slutsky matrix for the world demand and a condition of similarity of the matrix across countries, and (2) the combination of the gross-substitutes for the world demand and the substitutes condition of the demand of the country that impose a tari¤ on its import. The Lerner paradox is precluded by contition (1) as well, and by a condition imposed on the importing country as (2). Indeed, the concept of gross-substitutability itself was noticed by Metzler (1945). Here it is found to be a useful tool for analyzing the paradox proposed by himself, as Mundell (1964) explored the link of the tari¤ question to the concept of grosssubstitutability. The similarity condition to be required here concerns the similarity 1Lerner (1936) already mentioned this situation but only in a particular context where the government spends the most of tari¤ revenues.

THE MOVEMENT of the terms of trade of a country or an area is measured by means of the ratio of two index numbers: an index number of the prices received for exports and an index number of the prices paid for imports. Variations in the terms of trade may be said to measure changes in the quantity of imports which can be obtained in exchange for a given quantity of exports. When export prices have risen more or fallen less than import prices and when, accordingly, the quantity of imports that can be obtained for the same quantity of exports is greater than in a given base period, the terms of trade of a country or an area are said to be more favorable than in the base period. The converse is true when export prices have risen less or fallen more than import prices. It should be borne in mind that the term "favorable" (and, conversely, "unfavorable") has significance only if used in conjunction with a specified base period; this point is of particular importance because of the sharp difference in prices between the two prewar years, 1937 and 1938, which are most commonly used as base years. Movements in the terms of trade of a country constitute an important element in changes in a country's balance of payments position. But they are not the sole factor of importance. The volume of exports which can be produced or for which a market can be found abroad, the availability of foreign loans, the possibility of obtaining imports promptly in the quantities desired at current prices, the flow of foreign exchange from the tourist trade, and other invisible items are also among the many factors that play an important, and often decisive, role in determining the position of a country's balance of payments. This paper, however, is limited to the terms of trade of Latin American countries and their measurement; no attempt has been made to discuss other factors. The period studied was undoubtedly an exceptional one. For the reasons indicated below, it would in any event be a mistake to attach too much importance to the apparently precise figures which emerge from the analysis that has been made. The margin of error is necessarily great; the study may, however, be accepted as on the one hand indicating the widely divergent experiences of the Latin American countries and on the other hand illustrating the effectiveness of the techniques available for studying the terms of trade.

Price movements of internationally traded goods, as well as changes in the volume and product composition of trade, affect the gains an individual country can reap from international trade. These gains are traditionally measured by the terms of trade (the evolution of a country’s export prices relative to its import prices) and the purchasing power of its exports (defined as the export value deflated by import prices). The impact of price movements in global markets for primary commodities and manufactures on both these measures is determined, in the short term, by the composition of a country’s imports and exports, and, in the medium term, by its flexibility in being able to adapt the composition of its exports and imports to changing international demand and supply conditions. Clearly, the impact of a change in the terms of trade on an economy increases with the relative importance of external trade in its GDP.

Terms of Trade (ToT) is a crucial indicator in international trade that illustrates the ratio between a country's export prices and import prices. This concept provides an overview of a country's purchasing power in the global market and reflects the relative benefits gained from trade. An increase in ToT indicates enhanced purchasing power, leading to benefits such as trade surpluses, strengthened currency value, and economic growth. Conversely, a decline in ToT negatively impacts a country, causing inflation, trade deficits, and weakened public purchasing power. Factors such as global commodity price fluctuations, exchange rates, export-import demand, and trade policies significantly influence ToT. This study highlights the importance of understanding ToT as a strategic tool in formulating trade and economic policies, especially for countries reliant on commodity exports. With proper understanding, countries can mitigate the adverse effects of ToT fluctuations and enhance societal welfare through adaptive and responsive policies.

First Section: IntroductionFirst, in order to proceed we must define the “Terms of Trade”. Terms of trade is a relationship between the prices of exports and the prices of imports, it’s mathematical expression is as follows:Px/PmSecond, we assume there are two countries trading with each other, USA and China with US dollar and Chinese Yuan monies. Further, the terms of trade for both of these countries are as follows:USA’s Terms of Trade: PXus/PMus China’s Terms of Trade: PXch/PMchNow, lets Investigate three different outcomes for exchange rate (in trade account framework) by this approach:A - Primary Equlibrium Status: In this case the terms of trade of the two countries are in equilibrium, here we assume the tow monies are equal in value for simplicity, so we could have the following equations: PXus/PMus = PXch/PMch ------------- Dus = Uch or DUSe = UCHeAs it is clear from the equation, there is an equilibrium and we have no change at all.B - Increasing of the US terms of trade: The increase in terms of trade for US causes the increase in price of US exports (the price for us imports is constant) which in turn decreases the demand for DUS and devalues the DUS, other things being held constant. So we could have:PXus/PMus UCHThe converse would happen to China’s terms.C - Decreasing of the US terms of trade: The Decrease in terms of trade for US causes the Decrease in price of US exports (the price for US imports is constant) which in turn Increases the demand for DUS and upvalues the DUS, other things being held constant. So we could have:PXus/PMus > PXch/PMch ------------- DUS> UCHThe converse would happen to China’s terms.

Previous articleNext article No AccessInflation in Barbados: An Econometric InvestigationAndrew S. DownesAndrew S. Downes Search for more articles by this author PDFPDF PLUS Add to favoritesDownload CitationTrack CitationsPermissionsReprints Share onFacebookTwitterLinkedInRedditEmail SectionsMoreDetailsFiguresReferencesCited by Economic Development and Cultural Change Volume 33, Number 3Apr., 1985 Article DOIhttps://doi.org/10.1086/451477 Views: 3Total views on this site Citations: 1Citations are reported from Crossref Copyright 1985 The University of ChicagoPDF download Crossref reports the following articles citing this article:RODNEY J. MORRISON Inflation in Portugal, 1953-1980: An Econometric Analysis, Kyklos 40, no.22 (May 2007): 219–237.https://doi.org/10.1111/j.1467-6435.1987.tb02673.x