Primary Commodity Prices, Manufactured Goods Prices, and the Terms of Trade of Developing Countries: What the Long Run Shows

TLDR

The study revisits the empirical basis for the alleged secular decline in primary commodity prices relative to manufactured goods, noting that quality improvements in manufactures may magnify the observed decline. The authors construct a new commodity price index and two modified manufactured goods indices to analyze price trends from 1900 to 1986. The analysis confirms a secular decline in primary commodity prices relative to manufactures (≈0.5–0.6% per year), but the magnitude differs from Prebisch’s estimate, and while terms of trade for nonfuel commodities have fallen, the overall purchasing power of exports and income terms of trade for developing countries have risen.

Abstract

The authors revisit in this article the empirical foundation of the alleged secular decline in the prices of primary commodities relative to those of manufactures. They use a newly constructed index of commodity prices and two modified indexes of manufactured good prices, and find that from 1900 to 1986 the relative prices of all primary commodities fell on trend by 0.5 percent a year and those of nonfuel primary commodities by 0.6 percent a year. They thus confirm the sign, but not the magnitude, of the trend implicit in the work of Prebisch. But even the more limited secular decline shown by their relative price indexes may be magnified by an incomplete account of quality improvements in manufactures. They then show that the evolution of the terms of trade of nonfuel primary commodities is not the same as that of the net barter terms of trade of non-oil-exporting developing countries. Finally, they find that despite the decline that has probably occurred during the current century in the terms of trade of nonfuel primary commodities, the purchasing power of total exports of these products has increased considerably. Similarly, the fall that may have occurred after World War II in the net barter terms of trade of developing countries seems to have been more than compensated for by the steady improvement in their income terms of trade.