Abstract
Abstract. I explore how the concept of “the terms of trade” has been used since Alfred Marshall coined it. Early writers (Taussig, Viner, Dorrance) constructed variations on the relative price of traded goods that Marshall was concerned with, but most of these variations have been left behind in modern uses of the term, which today almost always refer to a relative price of exports and imports. However, when authors have wanted to identify the terms of trade with a particular country and to represent it either symbolically in an economic model or empirically, they have had to choose between defining the terms of trade as the relative price of exports or the relative price of imports. The first to do this was Taussig, who chose the second option, but he was followed by Viner who chose the first, and Viner was followed in this choice by almost all writers for the next several decades. Then, around 1980, Taussig’s choice came back into fashion among scholars of international finance. I document this contrast in definitions between international trade and international finance, then add slightly to Viner’s argument for preferring that the terms of trade of a country be defined as the relative price of its exports.
Keywords. Terms of trade.
JEL. F10.References
Aghion, P., Bacchetta, P., Rancière, R., & Rogoff, K. (2009). Exchange rate volatility and productivity growth: The role of financial development. Journal of Monetary Economics, 56(4), 494-513. doi. 10.1016/j.jmoneco.2009.03.015
Aizenman, J., Edwards, S., & Riera-Crichton, D. (2012). Adjustment patterns to commodity terms of trade shocks: The role of exchange rate and international reserves policies. Journal of International Money and Finance, 31(8), 1990–2016. doi. 10.1016/j.jimonfin.2012.05.003
Ahmed, S. (1987). Government spending, the balance of trade, and the terms of trade in British history. Journal of Monetary Economics, 20(2), 195-220. doi. 10.1016/0304-3932(87)90014-6
Amano, R.A., & van Norden, S. (1995). Terms of trade and real exchange rates: Canadian evidence. Journal of International Money and Finance, 14(1), 83-104. doi. 10.1016/0261-5606(94)00016-T
Backus, D.K., Kehoe, P.J., & Kydland, F.E. (1994). Dynamics of the trade balance and the terms of trade: The J-Curve?. American Economic Review, 84(1), 84-103.
Backus, D.K., & Crucini, M.J. (2000). Oil prices and the terms of trade. Journal of International Economics, 50(1), 185-213. doi. 10.1016/S0022-1996(98)00064-6
Bagwell, K., & Staiger, R.W. (1999). An economic theory of GATT. American Economic Review 89(1), 215-248. doi. 10.1257/aer.89.1.215
Baldwin, R.E. (1955). Secular movements in the terms of trade,” American Economic Review, 45(2), 259- 269.
Belshaw, H. (1939). Stabilization in a dependent economy. Economic Record, 15(3), 40-60. doi. 10.1111/j.1475-4932.1939.tb01036.x
Benham, F. (1940). The terms of trade. Economica, 7(28), 360-376. doi. 10.2307/2550230
Berka, M., Devereux, M.B., & Engel, C. (2012). Real exchange rate adjustment in and out of the Eurozone. American Economic Review,102(3), 179–185. doi. 10.1257/aer.102.3.179
Blattman, C., Hwang, J., & Williamson, J.G. (2007). Winners and losers in the commodity lottery: The impact of terms of trade growth and volatility in the Periphery 1870–1939. Journal of Development Economics, 82(1), 156-179. doi. 10.1016/j.jdeveco.2005.09.003
Bleaney, M., & Greenaway, D. (1993). Long-run trends in the relative price of primary commodities and in the terms of trade of Developing Countries. Oxford Economic Papers, 45(3), 349-363.
Boulding, K.E. (1947). Economic analysis and agricultural policy. Canadian Journal of Economics and Political Science, 13(3), 436-446. doi. 10.1017/S0315489000024166
Branson, W.H., & Katseli-Papaefstratiou, L.T. (1980). Income instability, terms of trade, and the choice of exchange rate regime. Journal of Development Economics, 7(1), 49-69. doi. 10.1016/0304-3878(80)90027-9
Broda, C. (2001). Coping with terms-of-trade shocks: Pegs versus Floats. American Economic Review, 91(2), 376-380. doi. 10.1257/aer.91.2.376
Caliendo, L., & Parro, F. (2015). Estimates of the trade and welfare effects of NAFTA. Review of Economic Studies, 82(1), 1-44. doi. 10.1093/restud/rdu035
Choudhri, E.U. & Schembri, L.L. (2010). Productivity, the terms of trade, and the real exchange rate: Balassa–Samuelson Hypothesis Revisited. Review of International Economics, 18(5), 924-936. doi. 10.1111/j.1467-9396.2010.00917.x
Corden, W.M. (1957). Tariffs, subsidies and the terms of trade. Economica, 24(95), 235-242. doi. 10.2307/2551696
Corsetti, G., Martin, P., & Pesenti, P. (2007). Productivity, terms of trade and the ‘home market effect’. Journal of International Economics, 73(1), 99–127. doi. 10.1016/j.jinteco.2006.08.005
Crucini, M.J., Kose, M.A., & Otrok, C. (2011). What are the driving forces of international business cycles?. Review of Economic Dynamics, 14(1), 156-175. doi. 10.1016/j.red.2010.09.001
Cuddington, J.T., & Urzua, C.M. (1989). Trends and cycles in the net barter terms of trade: A new approach. Economic Journal, 99(396), 426-442. doi. 10.2307/2234034
Deardorff, A.V. (2014). Terms of Trade: Glossary of International Economics, 2nd edition, Singapore: World Scientific Publishers.
Deardorff, A.V. (2016). The Terms of Trade and Other Wonders: Deardorffs’ Glossary of International Economics, [Retrieved from].
De Gregorio, J., & Wolf, H. (1994). Terms of trade, productivity, and the real exchange rate. NBER Working Paper No. 4807. doi. 10.3386/w4807
Díaz, A., & Carlos F. (1980). Exchange rates and terms of trade in the Argentine Republic, 1913-1976,” in M. Syrquin & S. Teitel, (eds), Trade, Stability, Technology, and Equity in Latin America, New York: Academic Press, pp. 27-43.
Diewert, W.I., & Morrison, C.J. (1985). Adjusting output and productivity indexes for changes in the terms of trade. NBER Working Paper No. 1564. doi. 10.3386/w1564
Dornbusch, R. (1976a). Exchange rate expectations and monetary policy. Journal of International Economics, 6(3), 231-244. doi. 10.1016/0022-1996(76)90001-5
Dornbusch, R. (1976b). Expectations and exchange rate dynamics. Journal of Political Economy, 84(6), 1161-1176. doi. 10.1086/260506
Dorrance, G.S. (1948). The income terms of trade. Review of Economic Studies, 16(1), 50-56. doi. 10.2307/2296143
Epifani, P., & Gancia, G. (2009). Openness, government size and the terms of trade. Review of Economic Studies, 76(2), 629-668. doi. 10.1111/j.1467-937X.2009.00546.x
Feenstra, R.C., Mandel, B.R., Marshall, & Slaughter. M.J. (2013). Effects of terms of trade gains and tariff changes on the measurement of US productivity growth. American Economic Journal: Economic Policy, 5(1), 59-93. doi. 10.1257/pol.5.1.59
Findlay, R. (1980). The terms of trade and equilibrium growth in the World economy. American Economic Review, 70(3), 291-299.
Frenkel, J.A., & Razin, A. (1987). Fiscal Policies and the World Economy: An Intertemporal Approach, Cambridge, MA: MIT Press.
Grilli, E.R., & Yang, M.C. (1988). Primary commodity prices, manufactured goods prices, and the terms of trade of developing countries: What the Long Run Shows. World Bank Economic Review, 2(1), 1-47.
Gruen, D.W.R., & Wilkinson, J. (1994). Australia's real exchange rate-is it explained by the terms of trade or by real interest differentials?. Economic Record, 70(209), 204-219. doi. 10.1111/j.1475-4932.1994.tb01839.x
Hadass, Y.S., & Williamson, J.G. (2001). Terms of trade shocks and economic performance 1870-1940: Prebisch and Singer Revisited. NBER Working Paper No. 8188. doi. 10.3386/w8188
Hanson, G.H. (2012). The rise of Middle Kingdoms: Emerging economies in global trade. NBER Working Paper, No.17961. doi. 10.3386/w17961
Harberger, A.C. (1952). Pitfalls in mathematical model-building,” American Economic Review, 42(5), 55-865.
Imlah, A.H. (1950). The terms of trade of the United Kingdom, 1798-1913. Journal of Economic History, 10(2), 170-194. doi. 10.1017/S0022050700064123
Jacob, P., & Peersman, G. (2013). Dissecting the dynamics of the US trade balance in an estimated equilibrium model. Journal of International Economics, 90(2), 302-315. doi. 10.1016/j.jinteco.2013.01.004
Johnson, H. (1951). Optimum welfare and maximum revenue tariffs. Review of Economic Studies, 19(1), 28-35. doi. 10.2307/2296268
Kaldor, N. (1940). A note on tariffs and the terms of trade. Economica, 7(28), 377-380. doi. 10.2307/2550231
Kaplinsky, R. (2006). Revisiting the revisited terms of trade: Will China make a difference?” World Development, 34(6), 981-995. doi. 10.1016/j.worlddev.2005.11.011
Kehoe, T.J., & Ruhl, K.J. (2008). Are shocks to the terms of trade shocks to productivity?” Review of Economic Dynamics, 11(4), 804-819. doi. 10.1016/j.red.2008.04.001
Kemp, M.C. (1955). Technological change, the terms of trade and welfare. Economic Journal, 65(259), 457-473. doi. 10.2307/2227325
Kindleberger, C.P. (1955). Industrial Europe's terms of trade on current account, 1870-1953. Economic Journal, 65(257), 19-35. doi. 10.2307/2227440
Kohli, U. (2004). Real GDP, real domestic income, and terms-of-trade changes. Journal of International Economics, 62(1), 83-106. doi. 10.1016/j.jinteco.2003.07.002
Krueger, A.O., & Sonnenschein, H. (1967). The terms of trade, the gains from trade and price divergence. International Economic Review, 8(1), 121-127. doi. 10.2307/2525389
Leontief, W.W. (1933). The use of indifference curves in the analysis of foreign trade. Quarterly Journal of Economics, 47(3), 493-503. doi. 10.2307/1883982
Marshall, A. (1923). Money, Credit and Commerce, London: Macmillan and Co.
Mauldon, F.R.E., & Anderson, D.L. (1939). Terms of exchange of industry groups. Economic Record, 15(2), 197-210. doi. 10.1111/j.1475-4932.1939.tb01026.x
Meier, G.M. (1952). Long period determinants of Britain's terms of trade, 1880-1913. Review of Economic Studies, 20(2), 115-130.
Mendoza, E.G. (1995). The terms of trade, the real exchange rate, and economic fluctuations. International Economic Review, 36(1), 101-137. doi. 10.2307/2527429
Mundell, R.A. (1964). Tariff preferences and the terms of trade. Manchester School of Economic and Social Studies, 32(1), 54-64. doi. 10.1111/j.1467-9957.1964.tb01029.x
Obstfeld, M. (1980). Intermediate imports, the terms of trade, and the dynamics of the exchange rate and current account. Journal of International Economics, 10(4), 461-480. doi. 10.1016/0022-1996(80)90001-X
Obstfeld, M. (1981). Aggregate spending and the terms of trade: Is there a Laursen-Metzler Effect?. NBER Working Paper, No. 686. doi. 10.3386/w0686 (Published in QJE 1982, 97(2), 251-270. doi. 10.2307/1880757
Obstfeld, M., & Rogoff, K. (1995). Exchange rate dynamics redux. Journal of Political Economy 103(3), 624-660. doi. 10.1086/261997
Obstfeld, M., & Rogoff, K. (1996). Foundations of International Macroeconoics, Cambridge, MA: MIT Press.
Obstfeld, M., & Rogoff, K. (2000). New directions for stochastic open economy models. Journal of International Economics, 50(1), 117-153. doi. 10.1016/S0022-1996(99)00034-3
Ostry, J. (1988). The balance of trade, the terms of trade, and the real exchange rate: An intertemporal optimizing framework. IMF Working Paper, No.88/2.
Ostry, J.D., & Reinhart, C.M. (1992). Private saving and terms of trade shocks: Evidence from developing countries. IMF Staff Papers, 39(3), 495-517. doi. 10.2307/3867471
Persson, T. & Svensson, L.E.O. (1985). Current account dynamics and the terms of trade: Harberger-Laursen-Metzler two generations later. Journal of Political Economy, 93(1), 43-65. doi. 10.1086/261286
Pigou, A.C. (1950). Unrequited imports. Economic Journal, 60(238), 241-254. doi. 10.2307/2227053
Powell, A. (1991). Commodity and developing country terms of trade: What does the long run show?. Economic Journal, 101(409), 1485-1496. doi. 10.2307/2234898
Samuelson, P.A. (1952). The transfer problem and transport costs: The terms of trade when impediments are absent. Economic Journal, 62(246), 278-304. doi. 10.2307/2227005
Sapsford, D. (1985). The statistical debate on the net barter terms of trade between primary commodities and manufactures: A comment and some additional evidence. Economic Journal, 95(379), 781-788. doi. 10.2307/2233042
Sarkar, P., & Singer, H.W. (1991). Manufactured exports of developing countries and their terms of trade since 1965. World Development, 19(4), 333-340. doi. 10.1016/0305-750X(91)90180-P
Schiff, E. (1942). Direct investments, terms of trade, and balance of payments. Quarterly Journal of Economics, 56(2), 307-320. doi. 10.2307/1881934
Sen, P., & Turnovsky, S.J. (1989). Deterioration of the terms of trade and capital accumulation: A re-examination of the Laursen-Metzler Effect. Journal of International Economics, 26(3-4), 227-250. doi. 10.1016/0022-1996(89)90002-0
Shiells, C.R., & Reinert, K.A. (1993). Armington models and terms-of-trade effects: Some econometric evidence for North America. Canadian Journal of Economics, 26(2), 299-316.
Spatafora, N., & Tytell, I. (2009). Commodity terms of trade: The history of booms and busts. IMF Working Paper, No. 09/205. doi. 10.2307/135909
Spraos, J. (1980). The statistical debate on the net barter terms of trade between primary commodities and nanufactures. Economic Journal, 90(357), 107-128. doi. 10.2307/2231659
Svensson, L.E.O. (1985). Currency prices, terms of trade, and interest rates. Journal of International Economics, 18(1-2), 17-41. doi. 10.1016/0022-1996(85)90003-0
Svensson, L.E.O., & Razin, A. (1983). The terms of trade and the current account: The Harberger-Laursen-Metzler Effect. Journal of Political Economy, 91(1), 97-125. doi. 10.1086/261130
Taussig, F.W. (1927). International Trade, New York: Macmillan Co.
Viner, J. (1937). Studies in the Theory of International Trade, New York: Harper and Brothers Publishers.
