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The Terms Of Trade Debate and the Policy Implications for Primary Product Producers

Author

Listed:
  • John E. Tilton

    (Division of Economics and Business, Colorado School of Mines and Department of Mining Engineering, School of Engineering, Pontificia Universidad Catőlica de Chile)

Abstract
The terms of trade debate initiated by Raul Prebisch and Hans Singer over 60 years ago continues to this day and is unlikely to be resolved soon. However, even if Prebisch and Singer are right and the terms of trade of countries exporting primary products are falling, to suggest that these countries should diversify away from the production of mineral commodities and other primary products, as many have done, may be poor policy advice, encouraging countries to abandon a promising source of wealth with which to foster economic development. This is because the prices of most goods are correlated with their production costs. If the prices of primary products are falling but a country's production costs are falling more, the profits, producer surplus, and wealth that the country realizes are rising, increasing the benefits it reaps from its primary product production and trade. Alternatively, when prices are rising but a country's costs are rising faster, the benefits it enjoys are falling notwithstanding higher primary product prices. While it has long been recognized that falling costs can conceivably offset the adverse effects of lower prices and declining terms of trade for primary product producers, much of the available literature either ignores this likely possibility or contends in fact changes in relative product prices do not reflect changes in their production costs

Suggested Citation

  • John E. Tilton, 2012. "The Terms Of Trade Debate and the Policy Implications for Primary Product Producers," Working Papers 2012-11, Colorado School of Mines, Division of Economics and Business.
    • Handle: RePEc:mns:wpaper:wp201211
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    File URL: http://econbus-papers.mines.edu/working-papers/wp201211.pdf
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    References listed on IDEAS

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    3. Iizuka, Michiko & Vargas, Fernando & Baumann, Jakob, 2017. "Financial mechanism to invest in knowledge from natural resource revenues: Experiences from Bolivia, Chile, Colombia and Peru," MERIT Working Papers 2017-042, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
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    More about this item

    Keywords

    Terms of trade debate; Prebisch Singer thesis; resource curse; natural resource wealth and economic development; primary product prices and production costs.;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • L7 - Industrial Organization - - Industry Studies: Primary Products and Construction
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy
    • Q1 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture
    • Q2 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation
    • Q3 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

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