Commodity Terms Of Trade Research Articles

What moves commodity terms-of-trade? Evidence from 178 countries

Despite the important impact of commodity terms-of-trade (CTOT) on GDP growth, child mortality rates and public debt, little is known about its determinants. Using data from 178 countries (grouped according to their commodity export-import structure) over the period 1962 to 2020, we examine the short-and long-run effects of global economic activity, OECD and emerging markets growth, the exchange rate of U.S. dollar, stock price volatility and real interest rates on CTOT growth. We demonstrate their typical asymmetric effect on exporters and importers, and show, for example, that the exchange rate of the U.S. dollar also exhibits opposite effects over the short and long run due to inelastic commodity demand. We find that the growth of emerging market economies provides the most universal and consistent effect across all of our subsamples (i.e., energy and non-energy exporters and importers) - this latter point underscores the contemporary global importance of developing countries' growth.

Commodity terms of trade volatility and industry growth

The rising volatility of commodity terms of trade (CTOT) is associated with a high cost of capital and a low credit supply for producers in commodity-dependent countries. In this paper, we examine how volatile CTOT influences various industries’ growth performance based on sector-level panel data for countries specializing in commodity exports. We find robust evidence that CTOT volatility causes a more significant growth loss in manufacturing sectors facing tighter credit constraints. The adverse growth effects operate through lower total factor productivity in industries heavily reliant on external finance for long-term investments and through lower capital accumulation in industries with high liquidity needs for short-term working capital. Our findings offer a complementary explanation for the “resource curse” through the credit constraint channel.

Global financial cycle, commodity terms of trade and financial spreads in emerging markets and developing economies

We examine how negative shocks which affect global financial conditions spill over into EMDEs through a fall in commodity terms of trade and greater financial spread. We estimate a two-equation dynamic panel data model for 33 of these economies during 1999.Q1-2020.Q4 to identify the effect of changes in the global financial conditions on the terms of trade and financial spread of commodities in these countries. In the first round, we focus on the diffusion of external negative financial spillovers from the financial center (the US) to the financial periphery, and to terms of trade and financial spread of commodities, leaving aside the feedback which operates from the first variable to the second one. In the second round, we allow commodities terms of trade to exert feedback on financial spreads. We find that the sign of this relationship depends on the productive structure and external trade pattern but differs from that of commodity net exporters and commodity net importers.

Trade shocks and labour market resilience in Sub-Saharan Africa: Does the franc zone response differently?

This paper aims to evaluate the impact of commodity terms of trade (CTOT) shocks on the labour market resilience of Sub-Saharan Africa (SSA) countries, comparing the franc zone countries on the one hand, from the non-franc zone countries on the other hand. The results from the PVAR estimation indicate a positive impact of commodity terms of trade shocks on labour market resilience in SSA countries. This finding holds in both the franc zone and the non-franc zone countries. When robustness is checked through the PSTR, this positive relationship is established to be non-linear. The policy implications of the study invite the policy makers to diversify their economies to limit their heavy reliance on commodities.

Global Financial Cycle, Commodity Terms of Trade and Financial Spreads in Emerging Markets and Developing Economies

Global Financial Cycle, Commodity Terms of Trade and Financial Spreads in Emerging Markets and Developing Economies

A two‐country, three‐commodity Ricardian trade model with Keynesian unemployment

AbstractConventional trade models either assume full employment or suppose imperfect labor markets and attribute unemployment to the imperfectness. Needless to say, Keynesian unemployment arising from a shortage of effective demand has not been considered. In this paper, our two‐country, three‐commodity trade model determines patterns of the international division of labor, commodity terms of trade, relative wage rates and employment quantities in each country simultaneously, given the production techniques, labor endowments and effective demand. Furthermore, the model argues the significance of link commodities commonly produced in both countries and quantity adjustments without price changes in the face of demand changes.

An Analysis of the Importance of Terms of Trade in South Africa Using Impulse Response Function

The understanding of the terms of trade is essential as its worsening can cause severe disruptions in any economy. South Africa, as a developing nation and a net importer, coupled with its low contribution to the global export market, is not spared the effects of the volatility of export prices. It is therefore important to observe the effects of a negative shock in the commodity terms of trade on selected key macroeconomic variables. Using quarterly data from the period 1988: Q2 to 2019: Q3, the study adopted the Monte Carlo impulse response function and variance decomposition analyses to examine the path of a given variable that resulted from a negative shock in the terms of trade. The results showed that all the variables responded, as expected, to the shock in the commodity terms of trade, both in the short and long run, and that they all returned to stable states. The study further showed the importance of output growth, exchange rate and investment in explaining the commodity terms of trade decomposition. The study concludes by providing some policy recommendations.

Foreign Trade in the View of Competitiveness in the EU

Competitiveness is examined at national, regional and corporate levels. The primary aim of the study is to present and analyse the competitiveness of the EU Member States and to evaluate trends. Two statistical indicators are worth considering: the commodity terms of trade (C), also known as the net barter terms of trade (N), and the income terms of trade index (I), which expresses the correlation between changes in prices and quantities. The economic structure allows the surplus in the balance of trade with most countries, and also requires improvement in the exchange rate. The indicator seeks primarily to capture the knowledge capital present in the country, which may facilitated by the structure and characteristics of trade. The export surplus to GDP is extremely high for Ireland, Switzerland and the Netherlands. The United Kingdom, France and Romania recognised negative trade balances. Nominal trading values continued to rise in 2018 as a result of volume and price changes. Global commodity exports increased by 10 per cent, driven mainly by the 20 per cent rise in oil prices. Growth in exports and GDP need rapid development in innovation. Export grows significantly faster in Euro Area Member States then in other EU Member States.

The Role of Oil Fund and Institutional Quality in Moderating Volatility in Nigeria

Many oil-endowed countries, including Nigeria, have been unable to use their resources to project long-term economic growth, a condition often referred to as a resource curse. Using the ARDL method and country-specific data, this article explores the long-term equilibrium relationship between economic growth and commodities terms of trade and its volatility in Nigeria between 1984 and 2014. Moreover, the role of oil fund and governance quality in the long-term growth performance is revealed. The results reported in this article show a long-term relationship between commodity terms of trade and economic growth. More importantly, commodity terms of trade, affects economic growth through capital accumulation and total factor productivity. However, the establishment of oil funds in Nigeria has not had any significant impact on economic growth.

Do sovereign wealth funds dampen the negative effects of commodity price volatility?

This paper studies the impact of commodity terms of trade (CToT) volatility on economic growth (and its sources) in a sample of 69 commodity-dependent countries, and assesses the role of Sovereign Wealth Funds (SWFs) and quality of institutions in their long-term growth performance. Using annual data over the period 1981–2014, we employ the Cross-Sectionally augmented Autoregressive Distributive Lag (CS-ARDL) methodology for estimation to account for cross-country heterogeneity, cross-sectional dependence, and feedback effects. We find that while CToT volatility exerts a negative impact on economic growth (operating through lower accumulation of physical capital and lower TFP), the average impact is dampened if a country has a SWF and better institutional quality (hence a more stable government expenditure).

Emerging economies business cycles: The role of commodity terms of trade news

Recent empirical work has challenged the hypothesis that terms-of-trade shocks are an important source of cyclical fluctuations in emerging economies. We show that ignoring the news component in the terms-of-trade movements results in misleading conclusions about their importance as a source of cyclical fluctuations. Using a sample of Latin American countries, we identify news-augmented Commodity-terms-of-trade (CTOT) shocks by maximizing the forecast error variance share of the CTOT series at a finite future horizon. Our identification does not rely on zero impact restrictions typically used in the literature for recovering news shocks. Accounting for news almost doubles the contribution of CTOT to explain cyclical fluctuations: news-augmented CTOT shocks explain almost half of output variations in emerging economies.

Do Sovereign Wealth Funds Dampen the Negative Effects of Commodity Price Volatility?

This paper studies the impact of commodity terms of trade (CToT) volatility on economic growth (and its sources) in a sample of 69 commodity-dependent countries, and assesses the role of Sovereign Wealth Funds (SWFs) and quality of institutions in their long-term growth performance. Using annual data over the period 1981-2014, we employ the Cross-Sectionally augmented Autoregressive Distributive Lag (CS-ARDL) methodology for estimation to account for cross-country heterogeneity, cross-sectional dependence, and feedback effects. We find that while CToT volatility exerts a negative impact on economic growth (operating through lower accumulation of physical capital and lower TFP), the average impact is dampened if a country has a SWF and better institutional quality (hence a more stable government expenditure).

Do Sovereign Wealth Funds Dampen the Negative Effects of Commodity Price Volatility?

This paper studies the impact of commodity terms of trade (CToT) volatility on economic growth (and its sources) in a sample of 69 commodity-dependent countries, and assesses the role of Sovereign Wealth Funds (SWFs) and quality of institutions in their long-term growth performance. Using annual data over the period 1981-2014, we employ the Cross-Sectionally augmented Autoregressive Distributive Lag (CS-ARDL) methodology for estimation to account for cross-country heterogeneity, cross-sectional dependence, and feedback effects. We find that while CToT volatility exerts a negative impact on economic growth (operating through lower accumulation of physical capital and lower TFP), the average impact is dampened if a country has a SWF and better institutional quality (hence a more stable government expenditure).

The Impact of Commodity Terms of Trade in Africa

The sharp increase in commodity prices that began in the early 2000s resulted in a marked improvement in terms of trade for Africa. Since then, commodity exporters’ terms of trade have declined despite a very moderate recovery in mid-2016. Terms of trade still remain higher than they were at the turn of the century, giving the false impression that conditions still favor Africa. The evidence, however, suggests that the commodity-driven prosperity has ended or, at best, has been interrupted for a long time to come. Some of these losses have not been realized fully because of unsustainable macroeconomic and foreign borrowing policies. These policies cannot be sustained, and the actual losses will catch up even if terms of trade do not deteriorate further. The complacency engendered by the relatively high gross domestic product (GDP) growth rates is misplaced, given the very rapid rate of population growth in Africa both in absolute terms and as compared to most other regions of the world. On the basis of the analysis presented in this article, a further decline or even stable terms of trade can be expected to have a significant negative effect on African economies. Many policymakers believe they are choosing between continued growth on the basis of present policies, or painful adjustment, usually imposed from outside. However, adjustment is inevitable. The real choice is between orderly and internationally supported correction and disorderly and disruptive crisis if current policies continue. It is imperative for the African countries, both highly concentrated exporters and more diversified economies, to focus on macroeconomic sustainability. In today’s adverse circumstances, and particularly given the fragile fiscal positions and mounting debts of many African countries, these policies are only possible if the economy adjusts to a sustainable path. Time is of the essence, and a conscious break with a policy of short-sighted comfort is required.

Trading on Their Terms? Commodity Exporters in the Aftermath of the Commodity Boom

Commodity prices have declined sharply over the past three years, and output growth has slowed considerably among countries that are net exporters of commodities. A critical question for policy makers in these economies is whether commodity windfalls influence potential output. Our analysis suggests that both actual and potential output move together with commodity terms of trade, but that actual output comoves twice as strongly as potential output. The weak commodity price outlook is estimated to subtract 1 to 21/4 percentage points from actual output growth annually on average during 2015-17. The forecast drag on potential output is about one-third of that for actual output.

Trading on Their Terms? Commodity Exporters in the Aftermath of the Commodity Boom

Commodity prices have declined sharply over the past three years, and output growth has slowed considerably among countries that are net exporters of commodities. A critical question for policy makers in these economies is whether commodity windfalls influence potential output. Our analysis suggests that both actual and potential output move together with commodity terms of trade, but that actual output comoves twice as strongly as potential output. The weak commodity price outlook is estimated to subtract 1 to 2¼ percentage points from actual output growth annually on average during 2015-17. The forecast drag on potential output is about one-third of that for actual output.

Crown Rule, Home Charges, and U.K.-India Terms of Trade

This paper examines possible determinants of the long-run bilateral commodity terms of trade between the United Kingdom and British India during the Crown Rule period of 1858-1947. The potential influences of aggregate real incomes, price levels/money supplies, international transportation costs, and the exchange rate are included in the analysis, but we especially focus on the Home Charges that India was obliged to pay to Britain. The econometric results provide some support for the hypothesis that a rise in Home Charges was associated with an improvement in Britain’s terms of trade with India. In addition, a clear role was played by changes in transport costs and in the exchange rate.

Productive capabilities: An empirical analysis of their drivers

Recent contributions to the growth and trade literature have argued that the structure of an economy, as measured by its productive capabilities, is a key determinant for inter-country differences in development. Productive capabilities have been shown to be highly predictive of future economic growth, yet the country-level variables associated with them remain relatively unknown. In this paper, we empirically explore what variables are systematically associated with productive capabilities using a model averaging framework that can handle a very large number of potential explanatory variables without the need for arbitrary model selection. In order to estimate our dynamic panel specification, we propose a novel Bayesian averaging of classical estimates procedure based on the simple and efficient bias-corrected least squares dummy variable estimator. Our baseline and robustness analysis consider a large number of variables, sample periods and model priors. We find that there is persistence (as measured by the lagged dependent variable) and that variables, such as commodity terms of trade, energy availability, government consumption, capital per worker, arable land and capital inflows show a strong and robust association with capabilities.

Commodity Price Changes and Economic Growth in Developing Countries

Using panel data 43 developing countries over the period 1980-2010, the paper examines the impact of the Commodity Terms of Trade (CTOT) Index on the real GDP per capita growth in developing countries. The study finds that for all countries in the sample, an increase in the CTOT index instantaneously leads to a statistically positive impact on the GDP per capita growth rate. Furthermore, the study finds evidence of resource curse under the Commodity Terms of Trade Index in developing countries. This suggests the need for improved management in the natural resources of developing countries. The energy sector proves to independently account for a resource curse. Better management is needed in the energy sector to counter the resource curse that has been reflected in the regression estimates especially in countries with a low score on the governance index.

Modelling the rand and commodity prices: A Granger causality and cointegration analysis

This paper examines the ‘commodity currency’ hypothesis of the Rand, that is, the postulate that the currency moves in line with commodity prices, and analyses the associated causality using nominal data between 1996 and 2010. We address both the short run and long run relationship between commodity prices and exchange rates. We find that while the levels of the series of both assets are difference stationary, they are not cointegrated. Further, we find the two variables are negatively related, with strong and significant causality running from commodity prices to the exchange rate and not vice versa, implying exogeneity in the determination of commodity prices with respect to the nominal exchange rate. The strength of the relationship is significantly weaker than other OECD commodity currencies. We surmise that the relationship is dynamic over time owing to the portfolio-rebalance argument and the Commodity Terms of Trade (CTT) effect and, in the absence of an error correction mechanism, this disconnect may be prolonged. For commodity and currency market participants, this implies that while futures and forward commodity prices may be useful leading indicators of future currency movements, the price risk management strategies may need to be recalibrated over time.