Improvement In Terms Of Trade Research Articles

Equalizing the Cost of Success: Equitable Graduation Rules and the Generalized System of Preferences

The developing countries which are beneficiaries of the GSP have reason to seek an ob jectiviely specified graduation rule to minimize the discretion of the U.S. government regard ing who graduates and when. Current rules based on per capita income, however, are not horizontally equitable across countries as they punish openness. We analyze this point in a stylized model of international trade and propose some alternative rules which may have some appeal to policy-makers in the U.S. and developing countries. The Generalized System of Preferences (GSP) was introduced by the U.S. in 1976 to provide for duty-free access from developing countries to the U.S. market. Some nineteen countries now have similar programs.1 The intent of the program is to foster economic development. Aid under the program takes an indirect form, via terms of trade improvement rather than direct transfers. The assistance is directed at developing countries. However, in the course of time as development takes place, countries change their status, from developing to developed.2 At that stage, the suc cessful country would no longer merit the aid provided by the GSP, and would graduate from the program. To facilitate graduation a rule specifying change in status is required. This paper is concerned with the determination of such rules. Whereas

TERMS OF TRADE VULNERABILITY AND NATIONAL WELFARE IN A SMALL OPEN ECONOMY

trade was presented by Brainard and Cooper (1967). They described lucidly how the presence of risk might imply an optimal re-allocation of resources so as to diversify that risk. The subsequent literature on trade and uncertainty divides into two camps: the first models trade choices as being made prior to the realisation of the random variables; while in the second, production decisions are made prior while consumption and trade decisions are made after the realisation. In their illuminating survey, Helpman and Razin (1978, Ch. 4) dub these two as Ex-Ante Trading Decision Models and Ex-Post Commodity Trading Decision Models. They show that the former is appropriate for one country if its trading partners follows the latter, and that if both are feasible, the latter will always be preferred. The model in this paper falls into the latter camp and involves a small open economy with all sectors operating in a perfectly competitive environment, and for simplicity, with only one sector facing an exogenous stochastic price process. We address three issues directly in this paper; they have been touched on tangentially elsewhere but we believe that they deserve direct treatment. The first and second issues concern the effects on expected national welfare of changes in the first two moments of the distribution of the terms of trade. The third issue examines government intervention, in the form of an ad-valorem production tax or subsidy, with an objective of achieving an optimal allocation of resources. In the absence of intervention, it is important to understand the welfare effects of an improvement in the mean terms of trade. In an undistorted world under certainty, an improvement in the terms of trade always improves welfare. As one might expect, the outcome is ambiguous when an uncertainty distortion is introduced. The reasons are somewhat complicated because the mean terms of trade positively influences the variance of national income and covaries with it. The relative degree of risk aversion between producers and consumers matters because the risk-averse producer effect supports the certainty result. In the same manner, we study how an increase in price riskiness will affect expected national welfare. At first sight, one might be tempted to guess that greater riskiness must reduce national welfare. There are two reasons why this view is mistaken; firstly, in general we do not know whether consumers dislike or like price risk; and secondly, although national income positively covaries

Terms of Trade and Welfare: A General Analysis*

We develop a necessary and a sufficient condition for an improvement in terms of trade to reduce welfare under a general setting, which can accommodate various types of market stucture and trade distortions. We also apply the conditions to two specific cases, viz export subsidies and the existence of monopoly in a non‐tradeable sector. It is found that a rise in price for an exportable commodity which is subsidized may well reduce welfare. Also, improvements in terms of trade may well harm the economy if there is a non‐tradeable monopoly sector.

Controls and the Intersectoral Terms of Trade: The Indian Case

sectors.' The Indian economy is substantially insulated from outside market forces, and the direction of movement of the intersectoral terms of trade has therefore been regarded as having special policy importance. Industry is equated with the urban, modern sector; agriculture with the rural, traditional sector. While the debate on the North-South terms of trade following Singer (I 950) and Prebisch (i 964) has prompted discussion of international trade arrangements between developing and developed economies, the debate on the intersectoral trade seems to have played a comparable role in India.2 If growth, as with SingerPrebisch, causes a deterioration in the terms of trade of the traditional sector, then policy measures to offset the associated redistributive effects are seen in India as justified. These can take the form of subsidies to agriculture, maintenance of the current tax-free status of agriculture, and other measures. Equally, since extensive redistribution through tax transfer schemes is administratively infeasible, an improvement in the agricultural-industrial terms of trade in favour of agriculture is often seen as a substitute for other redistributive measures. Poverty is concentrated in rural areas, and manipulating the terms of trade in favour of agriculture through price controls, subsidies and the like is a widely supported policy stance. In this paper we argue that existing statistical studies of the intersectoral terms of trade in India are misleading, since they typically focus on the terms of trade at controlled prices. Price and other controls in India are so extensive that black market rather than controlled prices should clearly enter any assessment of changes in the intersectoral terms of trade. We also argue that the problem with these studies is analytically deeper than simply whether black market or controlled Drices should be used. Because of

Efeitos dos termos de troca externos sobre os preços e a produção doméstica: uma análise de equilíbrio geral.

This work analyzes how domestic prices and production react to changes in international terms of trade, subsidies and incentives to production of exportable goods. Previous works have dealt with some of these effects upon the Brazilian economy, but their focus was restricted to the interaction between export agriculture and agriculture destined for the domestic market. Here we also take into account interactions with the industrial sector by using a general equilibrium model. In section two, we build a theoretical model, showing that the effect of a change in the international terms of trade upon the real price of domestic goods depends only on the ranking of factor intensities on the sectors to be considered. An improvement in the international terms of trade lead to an increase in the real price of the domestic good only when the industrial sector is more intensive in capital (or labor) than the three sectors considered. In section three we show that the effect of a change in the international terms of trade on the quantity of gaods produced does not depend only on factorial intensities but also on consumer preference. An improvement in the terms of trade will always increase the production of exportable goods and decrease the production of domestic goods, as long as we admit that both goods are gross complements (or independent) that the domestic good is inferior, and that the import sector is more intensive in capital (or labor) than the three sectors of the economy.

Macro Prices and Structural Change: Discussion

Timmer's paper addresses an important set of issues often ignored by sectorally oriented agricultural economists. He wants to investigate the impact of changes in macro prices on the intersectoral terms of trade and a particular agricultural sector performance indicator, namely the sectors share of Gross Domestic Produlct (GDP). The model is constructed using data from seven Asia-Pacific developing countries and is then used to simulate the impacts of an international oil price increase. The basic hypothesis is that oil prices affect agriculture through the impacts of exchange rates on the intersectoral terms of trade. Because agriculture produces a relatively larger share of tradable goods, oil price increases cause an improvement in the intersectoral terms of trade in importing countries. The opposite occurs in oil-exporting countries. Therefore, Timmer expects and gets differential impacts on the performance of agricultural sectors.

Terms of trade and domestic distribution: Export-led growth with abundant labour

A general equilibrium macro model is constructed to explore effects of export-led growth policies on the terms of trade and the domestic distribution of a developing region with abundant labour. This region, the South, trades with another, the North; they have different technologies and supplies of factors. It is shown that under certain conditions of dualism in the production of goods and of abundant labour supply in the South, an increase in the volume of exports from the South may bring about a sustained worsening of the South's terms of trade with the North even if this increase in exports is due to a positive shift in demand from the North. This change in the terms of trade is accompanied by a sustained loss of purchasing power of wages within the South. These results take place in a Walrasian stable market. When technologies are more homogenous and labour less abundant, the results are reversed: increased exports will take place together with improvements in terms of trade and a tendency to equalise factor prices between the regions. The results argue for coordination of domestic and international policies with special attention to technologies and labour markets.

The Terms and Patterns of Hungarian Foreign Trade, 1882–1913

Volumes, prices, and composition of Hungarian trade are analyzed, focussing on the effects of association with Austria in a political and customs union in a time of increasing protectionism. The author concludes that the relative improvement in terms of trade with Austria compared to overall trade was an incomplete amelioration of a strong pre-existing pro-Austrian bias in the tariff system. Tariff policy strongly favored both countries' traditional exports, with the consequence that the structure of trade with Austria changed little, while that with the outside world was dramatically altered. Hungary's efforts at quasi-independence, especially with respect to import substitution in manufactures at Austrian expense, were essentially ineffective. The text and appendices contain numerous tables and descriptions of trade for important commodities and commodity groups.