Terms of Trade in Latin American Countries

Abstract

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.