Terms of Trade

1. Hypothesis of Secular
deterioration of terms of trade
Presented by - Ritika Katoch
MA 2nd Year 3rd Semester

2. Prebisch-Singer Thesis
 In May 1950, “The Economic Development of Latin America & its Principal
Problems” by Raul Prebisch, appeared under the UN’s imprint.
 In the same month Hans Singer published an article, “The Distribution of Gain
between Investing & Borrowing Countries” in the American Economic Review.

3. Prebisch-Singer Thesis
A common explanation for this is, that manufactured goods have a greater
income elasticity of demand than Primary products, especially food.
Therefore, as income rise, the demand for manufactured goods increase
rapidly more than demand for primary products.
What is Primary Products and Goods?
 Raw Materials

4. Prebisch-Singer Thesis
 “On the basis of exports statistics concerning United Kingdom between 1870 &
1940, Raul Prebisch demonstrated that the Terms of Trade had secular tendency to
move against the primary products & in favour of manufactured & capital goods”.
 So in Equation form,
Tg = Qm/Qx

5. Assumptions
 As income rises in the advanced countries, the pattern of demand shifts from primary products
to the manufactured products due to Engel’s law.
 There is slow rise in demand for primary products in the developed countries.
 The export market for product of LDC’s is competitive.
 The export market for products of developed countries is monopolistic.
 Wages and prices are low in LDC’s.
 The appearance of substitutes for products of LDC’s reduces demand for them.
 The benefit of increased productivity is not passed by the producers of manufactured products
in advanced countries to the LDC’s through lower prices.
 The economic growth in the LDC’s is indicated by income terms of trade.

6. Reasons of Secular deterioration of terms
of trade
 1. Absence of Qualitative Improvement of Products
 2. Technological Progress
 3. Low Income Elasticity of Demand

7. Criticism
 Not Firm Basis for Inference
 Overstatement of losses and understatement of gains
 Faulty Index of TOT
 Inapplicability of Engel’s Law
 Benefits of Foreign Investment

8. Thank you