Primary Commodity Prices Research Articles

A General Test of the Prebisch–Singer Hypothesis

This paper examines jointly the Prebisch–Singer hypothesis of a long‐term decline in the relative price of primary commodities and the appropriate framework in which it is tested. A general model is estimated which nests the univariate and bivariate time‐series models used in the past literature. The results suggest that the econometric models estimated in the majority of previous studies were misspecified. The evidence strongly supports the Prebisch–Singer hypothesis and rejects recent findings—that the terms of trade are characterized by infrequent negative shocks—in favor of a long‐term negative trend.

On Primary Commodity Prices: The Impact of Macroeconomic/Monetary Shocks

The hypothesis of a long-run quantifiable relationship between non-oil primary commodity prices and macroeconomic/monetary variables—focusing industrial production and effective exchange rate of the US dollar—is tested by cointegration technique using quarterly data for 1970q2–93q3. This confirmed equilibrium adjustment explains the origin of the observed coincidence of commodity price variations with the fluctuations of macroeconomic/monetary variables. An error correction specification, including interest rate, is therefore applied to estimate the observed disequilibrium prices of commodities in the context of steady-state solutions. This instantaneous adjustment explains why commodity prices have fluctuated more strongly over the last 2 decades than before.

El Niño and World Primary Commodity Prices: Warm Water or Hot Air?

This paper examines the historical effects of El Niño on world prices and economic activity. Although the primary focus is on world real non-oil primary commodity prices, the effects on G-7 consumer price inflation and GDP growth are also considered. This paper has several distinct advantages over previous studies. First, several econometric models are estimated using fairly broad measures of prices and economic activity. Second, the models include continuous measures of El Niño intensity (sea surface temperature and sea-level air pressure anomalies in the Pacific Ocean) rather than dummy variable measures. Finally, confidence intervals are constructed for all estimated effects of El Niño on world prices and economic activity. The analysis indicates that El Niño has economically-important and statistically-significant effects on world real commodity prices. A one-standard-deviation surprise in El Niño, for example, raises real commodity price inflation about 3-1/2 to 4 percentage points. Moreover, El Niño appears to account for over 20 percent of commodity price inflation movements over the past several years. El Niño also has some explanatory power for world consumer price inflation and world economic activity, accounting for about 10 to 15 percent of movements in those variables.

Composite commodities and the Prebisch-Singer thesis

We apply a principal component analysis (PCA) to study the Prebisch-Singer hypothesis as well as the development of the real prices of primary commodities. To justify the aggregation of primary commodities into a single commodity group a weak form of the composite-commodity theorem by Hicks (1946) is used. A structural analysis is applied to simulate the effects of a perfect stabilization of incomes of developed countries on the prices of primary commodities. The results indicate that a stabilization of Northern incomes would not have had a significant influence on the level and growth rates of primary commodity prices, although such a stabilization would have contributed to reduce the price volatility of primary commodities.

Drift in the relative price of primary commodities: a case where we care about unit roots

The evidence for the Prebisch-Singer hypothesis, of a downward drift over time in the relative price of primary commodities, is considered. The apparent strength of that evidence appears to depend, to a substantial degree, on whether the time series of relative prices is assumed to be trend stationary or integrated of order one. Moreover, the usual econometric tests are relatively uninformative on this question. These conclusions emerge whether or not a structural break in the series is permitted.

Primary commodity prices and the real exchange rate: the case of Australia 1900–91

How do real exchange rates of primary commodity exporters react to changes in the relative price of these exports? The relationship between these variables is examined using ninety-two years of Australian data. There is a significant positive correlation. However, the Australian real exchange rate does not display the downward trend that has been observed in the relative price of primary commodities. This is consistent with the hypothesis that the apparent long-run decline in the relative price of primary commodities is an artefact of inadequate quality adjustment in the price series for manufactures.

Trend in the international terms of trade between primary producers and manufacturers

Movements in the terms of trade between primary producers and manufacturers are analyzed using a model that introduces the influence of relative wage movements in the primary and manufacturing sectors as well as the influence of mark-up pricing in manufacturing. The model is estimated using data on the relative price of primary commodities and manufactured goods in international trade during the post-World War II (WWII) period. A decline in wages of primary-sector workers relative to those of workers in manufacturing and a rise in manufacturing margins are both estimated to have reduced the terms of trade for primary producers. However, expansion of manufacturing output is estimated to have a positive impact that has more than offset the negative influences during periods of moderate to strong growth.

Primary commodity prices and the OECD economic performance

The relationship linking primary commodity prices to the OECD economic performance is analyzed by explicitly accounting for the presence of a two-way causality. The macroeconomic model is built on a relatively small number of equations which represent the interplay of five markets: primary commodity-, financial-, OECD labour-, OECD and LDC product market. The difference between primary commodity- and manufactured good price formation is emphasized. Quantitative results are provided on the basis of historical estimations and dynamic simulations.

The long-run behavior of the relative price of primary commodities: Statistical evidence and policy implications

This paper is concerned with both the statistical and policy issues surrounding the long-run behavior of the ratio of primary commodities prices to those of manufactured goods, seen as a measure of the barter terms of trade between primary producers and the producers of manufacturers. The statistical evidence reported is found to offer support for the secular deterioration hypothesis. The policy implications of this finding for less-developed countries are explored.

Long-run trends in 26 primary commodity prices: A disaggregated look at the Prebisch-Singer hypothesis

This paper uses time series techniques to re-examine the Prebisch-Singer hypothesis that there has been a secular deterioration in primary commodity prices in terms of manufactured goods. Instead of using price indices, it considers 26 individual commodity prices over the period 1900–1983. This avoids possible aggregation and interpretation problems associated with the use of aggregate indices. The study finds that 16 of the 26 prices are trendless. Five have statistically significant negative trends; the remaining five have positive trends. It concludes that the Prebisch-Singer hypothesis should certainly not be considered a universal phenomenon or ‘stylized fact’.

The Prebisch-Singer Hypothesis: A Reappraisal Independent of Stationarity Hypotheses

time series behaviour of the relative price of primary commodities. Raul Prebisch (I950) and Hans Singer (I950) believed that the long-term trend of primary commodity prices was negative. The latter, in an interesting discussion of the above quandary (pp. 482-3), viewed rises in primary commodity prices as purely temporary sources of surplus that offered short lived opportunities to increase industrial investment. These opportunities were missed by private investors, who instead increased primary sector investment in such circumstances, because 'all private activity tends to be governed by the price

SMOOTHING PRIMARY EXPORTERS' PRICE RISKS: BONDS, FUTURES, OPTIONS AND INSURANCE *

The costs of primary commodity price instability are reviewed and can be significant. Even with full commitment on both sides and stationarity of prices international lending leads to nonstationary consumption. One-period futures improve smoothing and a rollover plan is quite effective under first-order serial correlation. With sovereign (exporter) risk the above instruments are infeasible. But packages of simple bonds and put options can achieve smoothing qualitatively similar to but less efficient than the constrained optimal state-contingent contracts for Markovian price processes. Bonds and options have the practical advantage of greater potential liquidity than more complex contracts. (authors)

A note on the stationarity of the primary commodities relative price index

The Prebisch-Singer hypothesis of a secular decline in the relative price of primary commodities is investigated searching for the presence of a deterministic rather than stochastic trend and controlling for major structural breaks. The evidence is in favour of a deterministic trend with a negative slope for the largest part of the century and a major structural break at the end of World War One.

Trends in the Terms of Trade of Primary Commodities, 1900-1982: The Controversy and Its Origins

Primary commodity markets have offered an opportunity for much economic debate on a number of key issues. First, secularly declining terms of trade of primary commodities are used to explain the widening gap between developing (LDCs) and developed countries (DCs). Second, they are regarded as a contributing factor to the creation of a structural condition of unequal exchange between a "dominating" industrial center and a "dominated" agrarian periphery. And third, they are thought to be a source of instability, often causing financial vulnerability to foreign exchange equilibria and fragility to international market institutions.

Commodity and Manufactures Prices in the Long Run

The low level of primary commodity prices since 1985 is examined in the context of the behavior of those prices relative to prices of manufactured goods since 1854. The Prebisch-Singer hypothesis of a secular decline in relative commodity prices is sustained, but the recent decline is shown to be well outside the realm of historical experience. Commodity and manufactures prices are found to be cointegrated, conditional on the negative trend and a number of unexplained short-term swings. The earlier finding of a Gibson paradox is explained in terms of the difference between short- and long-run relationships.

Commodity and Manufactures Prices in the Long Run

The low level of primary commodity prices since 1985 is examined in the context of the behavior of those prices relative to prices of manufactured goods since 1854. The Prebisch-Singer hypothesis of a secular decline in relative commodity prices is sustained, but the recent decline is shown to be well outside the realm of historical experience. Commodity and manufactures prices are found to be cointegrated, conditional on the negative trend and a number of unexplained short-term swings. The earlier finding of a Gibson paradox is explained in terms of the difference between short- and long-run relationships.

Primary Commodity Prices and the Terms of Trade*

This paper provides a survey of a range of issues involved in the analysis of primary commodity prices and the terms of trade. Particular emphasis is placed upon the long‐run behaviour of the terms of trade between primary commodities and manufactures and the paper presents some new evidence regarding the long‐run behaviour of Australia's terms of trade.

Consistent estimation of a disequilibrium model of primary commodity price adjustment

(1990). Consistent estimation of a disequilibrium model of primary commodity price adjustment. Applied Economics: Vol. 22, No. 10, pp. 1417-1426.

PRIMARY COMMODITY PRICES AND INFLATION

Primary commodities are products which have been only minimally processed—agricultural foods which may either be directly consumed or form an input into the food-processing industries, industrial raw materials which may either be agricultural (e.g. natural rubber) or mineral (mainly metals), and, most of important of all, petroleum and petroleum products. Primary commodity prices are variable (section II), and in part this variability is the result of macroeconomic fluctuations in the industrial ized countries. Rises in commodity prices will, to a greater or lesser extent, feed through into inflation.

Relative Commodity Prices and Cointegration

The Prebisch–Singer hypothesis of a secular decline in the relative price of primary commodities is reassessed, on the basis of recently available time series data, for 1900–1986. Special attention is given to adequate dynamic modeling of price fluctuations. Primary and manufactured-goods prices are found to be cointegrated. The hypothesis of stationarity for the long-run relative-price movements cannot be rejected. The empirical evidence does not support the Prebisch–Singer hypothesis.