Abstract
Terms of trade is associated with the gains from trade and subsequent economic welfare for a nation. Previous studies on terms of trade for oil exporting countries particularly investigating for a favorable terms of trade are missing. The study applies the Fixed Effect model on a panel of six oil producing countries of Gulf Cooperation Council for the period 2008 to 2016 and find that oil price is negatively associated with terms of trade, albeit weakly. Terms of trade is positively associated with economic growth; hence this study refutes the Prebisch-Singer hypothesis for these countries. Moreover, terms of trade is positively associated with trade opens and are not significantly associated with institutions, exchange rate and inflation. The results imply that these oil exporting countries have to reduce their dependence on oil price to attain favorable terms of trade through diversification of the export basket. Also further integration with the world economy through higher trade openness will help these countries to improve their terms of trade. This examination of factors impacting the terms of trade of oil exporting countries of GCC happens to fill a gap in the existing literature.
Highlights
A favorable terms of trade represent that an equal and proportionate increase in the export price over the imports, while the deterioration in the terms of trade represents the fall in the export price over the imports
This debate originated after the seminal works of Prebisch (1950) and Singer (1950) based on a United Nations study on United Kingdom (UK) which opined that the terms of trade of the third world countries continued to deteriorate over the long run since they are specialized in the production and export of the primary products
It is expected that econometric analysis would give further insights into the relationship of terms of trade with the oil price, gross domestic product (GDP) and other variable under study
Summary
A favorable terms of trade represent that an equal and proportionate increase in the export price over the imports, while the deterioration in the terms of trade represents the fall in the export price over the imports. It has even led to the demand for a new international economic order, ensuring equality in terms of sharing the benefits of trade This debate originated after the seminal works of Prebisch (1950) and Singer (1950) based on a United Nations study on United Kingdom (UK) which opined that the terms of trade of the third world countries continued to deteriorate over the long run since they are specialized in the production and export of the primary products. This formed the Prebisch-Singer hypothesis which highlighted that the demand is less elastic of primary products in general and agricultural products in particular demand than manufactured goods exported by developed countries. This make the terms of trade of primary product exporting countries to deteriorate, overtime
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