IB Econ Chap 26 Terms of Trade - Sunny Hills High School

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Terms of trade
By the end of fris chapter, you
rr define, explain, and give er

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26 o Terms of trade
Year I
Year 2
Year 3
Year 4
Year 5
Year 6
r00
r02
106
I0
108
106
Table 26.1 Terms of trade igures
i00
100
104
110
r06
r08
ffixroo
ffixroo
r06
104
|0..
I t0 "
t08 ..
l(lt)
x 100
import prices is relatively more great and so the TOT value falls a
little Lo 101.92. We say that there has been a detedoration in the
TOT, which means LhaL a givcn amount of cxports can buy fewer
imports than in year 2. However, the TOT in year 3 are still better
than in year l. In year 4, import prices dse by relatively more than
export prices and so the value of the TOT falls again, back to 100. So
in year 4 a given amount of exports will buy the samc amounL of
impofis as in year I. In year 5 export pdces fall but import priccs fall
by more, whicb this lcads to an improvement in the TOT and the
value rises to I0I.89.
We can sce from the example that if export pdces rise relative to
import prices, or if they lall by relatively less than imporL prices fall,
lhen the TOT will improve. In the same way, if import prices dse by
more than export prices. or iI rhey fall by relatively less than exporl
prices fall, then the TOT will dctcriorate.
The key thing to realize is that if the TOT improve, then a given
quantity of cxports will buy a larger quantity of imports than bcfore.
We often talk about a "basket" of exports, in the same way as
mcasuring inflation. I1 the price of a basket of exports lalls, Lhcn a
country will need to sell more exports in order to kccp imporLs at the
same level.
Student workpoint 26.1
Be a thinker
I Using the data in Table 26.1 , calculate the TOT for year 6.
2 Describe the changes !n the TOT from year 5. What does this mean
about the "buying power" of the country's exports?
5 How does the buying power of the country's exports in year 6
compare with year I ?
Asses$nent odviae: ln HL paper 3, you may be asked to calculate the terms of
trade as in workpoint 26.1 .
r00
100
r00
102
t0r.92
100
101.89
']

Language may be misleading. lt should be noted that the expressions
"improvement in the TOT" and "deterioration of the TOT" do not
necessarily mean what they mean in everyday language. A deterioration
of the TOT may not necessarily be a bad thing and an improvement
does not necessarily result in a good thing. We will look at the
consequences of changes in the TOT in future material.
While language is used to access knowledge it can sometimes be used
to confuse or even exclude. Can you think of other examples of
economic language that would make it dif{icult for non-economists to
know what economists are talking about?
Causes of changes in a country's telms of trade
in the short run and the long run
Short-run causes
Short-run changes in the TOT may be caused by the following.
. Changes in the conditi)ns 0f demand and supply: If the demand for
exports changes, i.e. if the demand curve shifts, then there will be
a change in the price of exports. Prices oI competitive goods in
other countries may change, affecting the competitiveness oI the
exports, incomes in importing countries may change, affecting the
demand for imports, and consumer tastes may change for the
goods and services that the country exports.
Changes in supply may also have a noticeable effect upon the
price of exports. II a number of countries experience an increased
supply of a certain product, perhaps because weather conditions
are favourable, then its price will fall. For example, record wine
harvests in Australia led to a 97o fall in average prices in 2006.
The effect oI such a change on the TOT depends on the
importance of overall expons of the good.
o Changes in relative inflation rates: If,lhe inflation rates in one country
are higher than in another then their export prices will begin to
rise. Although this results in an improvement in the TOT, the
country's exports will start to be less competilive.
o Changes in exchange rates: A change in the value of a country's
currency will lead to a change in the price of exports relative to
imports. The change in exchange rate may be through market
forces or as a result of government intervention in the foreign
exchange market.
Long-run causes
Long-run changes in the TOT have various causes.
o Income changes: Rising incomes, especlally in developed countries,
lead to an increase in demand for secondary and, especially,
tertiary products, whose income elasticity of demand tends to be
income elastic. This has an obvious effect upon the relative prices
of the types of products. The TOT of developed countries, which
produce more secondary and tertiary products, tend to improve
26 . Terms of trudu @!
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26 . Terms of trade
relative to the TOT oI developing countries, many of whom are
much more dependent upon the exponing of primary products,
whose income elasticity tends to be income-inelastic. In effect,
there is a change in world trade patterns.
Long-run improvements in productivity within a counry: This will lead
to a gradual deterioration of the TOT for that country because their
real prices will not rise significaltly. However, the country's exports
would be more competitive on the international markets and so
the result could be positive, if demand for the expots is elastic.
Long-run improvemmts in technology within a uuntry : This will lead
to lower costs of production, increases in supply, and lower
prices. If this occurs, then the country will experience a gradual
deterioralion in its TOT. This will, however, make the country's
exports more competitive and, if the elasticity of demand for its
exports is elastic, the balance of trade should improve.
Elasticity of demand for imports and expods
As you now realize, the concept of elasticity is very imponant in
economics. It is extremely relevant to our discussion of the TOT. We
need to go back to a discussion about the price elasticity of demand
for exports and imports in Chapter 24 to make an e{fective analysis
of TOT changes.
Price elasticity of demand for exports
As we know, the price elasticity of demand for exports is a measure
of the responsiveness of the demand for exports when there is a
change in the price of exports. It is measured by the equation:
Percentage change in demand for exports
PED....', = Percentage change in average price of erTorts
If the demand for exports is elastic, then a change in the average price
of exports will lead to a greater proportional change in the demand for
them. This would be good for a country where export prices were
falling, since export demand would rise by proponionately more than
the prices fell leadilg to an increase in export revenues. Most ex?orts,
certainly in the long run, face elastic demand, i.e. a value of PED."pon,
that is greater than I. However, many commodities (raw materials
such as oil, copper, coffee, cotton, steel, rice, sugar, and rubber) tend
to have inelastic demand.
Price elasticity of demand for imports
The price elasticity of demand for imports is a measure of the
responsiveness of the demand for imports when there is a change in
the price of imports. It is measured by the equation:
Percentage change in demand for imports
PEDi,rpofts : Percentage change in average price of imports
If the demand for imports is inelastic, then a change in the price of
imports will lead to a smaller proportional change in the demand Ior
them. This would not be good for a country where import pdces
were rising, since import demand would fall by proportionately more
than the prices increased. Most imports, certainly in the long run,
face elastic demand, i.e. a value of PED6oo,ts that is greater than I.
However, commodities tend to have inelastic demand.
Student workpoint 26.2
Be a thinker
Draw a revenue box diagram to
show and explain the effect of,
falling average export prices on
export revenues when demand
for exports is inelastic. On the
y-axis, write "Average price of
exports".
Student workpoint 26.7
Be a thinker
Draw a revenue box diagram to
show and explain the effect of
rising average import prices
on export expenditure when
demand for exports is inelastic.
Label the y-axis 'Average price
of imports".

How beneficial is an improvement in the
terms of trade?
As noted earlier, an improvement in the TOT is not necessadly a
good thing. We need to consider the effect of an improvement in the
TOT on a country's current account balance. The outcome will
depend upon the reason for the improvement. Possible reasons for
improvement include the following.
An increase in demand for a count{s exports
A number of factors may cause demand for a country's exports to
rise. Consider the exports ftom country A. Prices in other countries
may have risen, making country .As exports more competitive;
ilcomes in importing countries may have risen, increasing their
demand for imports and so increasing demand for country As
exports; and consumer tastes may have changed in favour of the
goods and services that country A exports.
An increase in the demand for country -4s exports is shown in
Figure 26.1.
When the demand increases the average export price rises from P to
Pr. The quantity oI expons demanded and supplied increases ftom Q to
Q1. The higher export prices mean that the TOT have improved, and
total export revenue rises from OPXQ to 0PryQr. This will lead in tum
to an improvement in the current account balance. We cal say that:
o An improvement in the TOT when caused by an increase in
demand for exports, leads to an improvement in the current
account balance.
Higher export plices caused by domestic inflation
Relative export prices may increase because a country is experiencing
inflation that is higher than in the countries with which it trades. If
this is the case then there will be an improvement in the TOT. Whether
this improvement in the TOT leads to an improvement in the orrent
account balance will depend upon the elasticity of demand for the
country's exports. The situation is shown in Figure 26.2.
The demand curve lor exports is normal and has the usual relationship
with the MR curve and the TR curve. As we know from
microeconomics, the value ol price elasticity of demand on a demand
curve falls as the price falls. There will be al elastic region oI the
demand curve and an inelastic region. These are shown in Figtre 26.2.
Il the demand for exports is inelastic, i.e. price is on lhe lower
paft of the demand curve, then an increase in price will lead to a
proportionately smaller decrease in demand and so total export
revenue will rise. As we see in the diagram, an increase in price from
P to PL leads to an increase in export revenue from ER to ERr. This
will improve the current account balance.
Therefore we can say that:
o An improvement in the terms of trade, when caused by inflation,
leads to an improvement in the current account balance when the
demand for exports is inelastic.
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26 . Terms of trade llll!
Quantity ol exports
Figure 26.1 An increase in demand
for exports
6 ER.
d rn.
EER
t
E'
0
Figure
export
I
]K
i TR (eipor6)
tnelastic demand
-.fr\
:,- -l- - - - ;\i. D (expofts)
MR
Quantity of exports
26.2 The demand for exports and
revenue

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26 . Terms of trade
If the demand for expofis is elastic, i.e. pdce is on the upper part
of the demand curvc, then an increase in price will lead to a
proportionately grcater decrease in demand and so total export
revenue will fall. As we see in the diagram, an increase'in price lrom
P2 to Pr leads to a fall in export revenue from ER2 to ER3. This witl
depreciate the cunent account balancc. We can say that:
. An improvcmcnt in the terms of trade when caused by inflation
leads to a deprecialion in the current account balance when the
demand lor exports is relatively elaslic.
When we compare this siluation to the real world, we notice two
things.
I The price elasticity of demand for most exports tends to be clastic.
For thc majority of products sold on cxport markets, there is much
compctition between countries and so demand tends to be elastic.
It is generally commodiLics that lace inelastic demand, so it is
likely that most countries will bc on the elastic part of the demand
curye {or their exports.
2 Even if demand is on the inelastic part of Lhc dcmand curve. if
relatively high inflation rates continue thcn rhc price of exports
will eventually movc into the elastic region of the demand curve.
Overall, an improvemcnt in the terms oI trade due to inflation
generally leads to a depreciation in thc current account balance.
The significance of deteriorating TOT for
developing countlies
We know that there are vast difTerences among developing countries.
Many developing countdes, but certainly noL all, arc hcavily
dependent on the exports of one or two commodities for their export
revenue. This is illustrated in Tablc 26.2.
Benin*
Burkina Faso*
Ethiopiat
Mali*
Angola**
Yemen**
93.8
q3.5
91.0
93.6
99.3
Bangladesht 12.4 826
Nepalt 28,0 72.0
95.1
Source: Country Profiles, WTO
* Non-oi -exporting LDC (least developed countries)
t l\/anufactures exporting LDC
*x Oilexporting LDC
fable 26.2 Share of primary commodities and manufactures in total merchandise
exports for selected LDCS,2008
6.2
6.5
9.0
6.4
0.7
4.9

We see that for the first six countries listed, the dependence on
the export of primary commodities, as compared with the export
of manufactured products, is very strong. For example, 9).8o/o o!
all Benin's merchandise export earnings come lrom the sale of
primary commodities. In the same manner, Mali earns 91.6%
of its merchandise export earnings by exporting primary
commodities.
Howeve! notice the difference between the first four countries and
the next two, as noted in the key. The first four are known as nonoil-exporting
LDCs, while Angola and Yemen are characterized as oilexporting
LDCs. Almost all o{ the export revenue for Angola and
Yemen comes from the sale of oil.
The last two countries, Bangladesh and Nepal, are different again.
They concentrate on the export of low-skill manufactured products,
especially textiles.
We can see from Table 26.3 that there is one more group of LDCs that
need to be identified, which are the services-exporting LDCS, such as
Cape Verde and rhe Maldives. These countries make most of their
export revenue from tourism.
Source: Country Profiles, WIO
f Services-exporting LDC
Table 26.3 Share of merchandise trade and services in total exports for selected
LDCS, 2008
The problems facing different groups of LDCs come from diflerent
sources. We are currently focusing on the problems facing those
developing countries that are dependent on the export of non-oil
commodities, because some of the barriers to lheir growth and
development are related to their terms ol trade.
32.5
More than 2 billion people in the developing worldover
one third of humanity-make their living from
agricultural commodities.
ln least developed countries (LDCS), one out of
four people lives and works in a rural area. Most
are small farmers or landless workers.
Eighty{ive developing countries depend on
commodities for more than half their export
earnings. Thirty-eight developing countries depend
on one agricultural product for more than 500/o of
their export revenues and 48 countries are
dependent on t\ /o agricultural export products.
67.5
26. Terms ot trua" [!
o ln January 2008, UNCIAD's price index for non-fuel
commodities reached its highest level (in current
dollars) since 1960. The index is up 1090/0 since
1992. Metal and mineral prices rose by 2l7olo
during the same period and agricultural raw
materials prices increased by 67010.
. ln real terms, however, the commodities index is
still low compared with levels attained in the 1970s
and eady I980s.
Source: UNCIAD Press Release, Ceneva, April 2008
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26 o Terms of trade
Student workpoint 26.4
Be an inquirer
Using the following profile based on information from
The New Agriculturolisf and, doing a little bit of research
on your own, answer the questions that follow.
Focus on Benin
One of Africa's
strongest
democracies,
Benin, a country of
undulating plains
and low mountain
ranges, borders
Nigeria, Niger,
Togo, and Burkina
Faso.
Despite its strong
democratic
example, Benin's
economic situation is less than healthy. Over half of the
population rely on subsistence farming for their
livelihood and the poor have not benefited from the
country's legacies as the once-powerful kingdom of
Dahomey and, more recently, as one of Africa's largest
cotton producers.
Benin is heavily dependent upon trade with its
neighbour Nigeria, leaving it vulnerable to that country's
economic volatility. And, although Benin has privatized
some of its national industry and encouraged foreign
direct investment, it has recently been ranked among
the poorest countries in the world in the United Nations
Human Development lndex.
The agricultural backbone
Cotton is the only cash crop available to small-scale
farmers, making up 400/0 of the country's CDP and over
80o/o of export revenues. A consequence is that the
Over half of Beninese are subsistence farrners
country's fertile land has suffered environmental
degradation as a result of the emphasis on production
of cotton for the export market and because 9Oo/o of all
pesticides are used on cotton. Heavy use of
agrochemicals has prompted widespread concern about
the sustainability of the industry; this was particularly so
between 1999 and 2000 following reintroduction of
the pesticide endosulfan, related to the banned DDT,
which led to many farmers'deaths.
The damage to both human health and the
environment has prompted the widespread introduction
of orSanic farming methods. Organic farming has almost
doubled since 2003. Organizations, such as the
Pesticide Action Netlvork based in the UK together with
local partner OBEPAB (Organisation Beninoise pour la
Promotion de lAgriculture Biologique), have trained
local farmers-particularly women-in integrated pest
management (lPM) and organic cotton farming through
Farmer Field Schools. IPM measures aimed at reducing
chemical pesticide use to a minimum include improving
soil fertilit/, recognizing disease, and encouraging
natural enemies.
Benin's export market has expanded to include other
agricultural products. lhe production of shea nut butter,
though more popular in Chana, is an activity now
strongly associated with women and reported to be, at
times, a more important source of income than cotton.
Shea nuts are a staple in the local diet and their
increasing use in the lucrative cosmetics industry is
promoting interest in the export value of shea butter
However, the process of making shea butter is laborious
and in some seasons may be unprofitable.
Since the mid-l9B0s Benin has increased production of
yams, cassava, maize, peanuts, and pulses to achieve
food security. Rice production, particularly of upland
varieties Srown on dry land, has been boosted by the
introduction of NERICA vadeties by the Africa Rice Center
(VVARDA).'lhe new varieties combine the hardiness of
indigenous rice with the high yielding characteristics of
Asian varieties, and they are said to produce 500/0 more
yield than local varieties without fertilizer use and up to
200 more with fertilizer application.
Although palm oil was a major cash crop in Benin during
the l98os, its cultivation was marginalized by the
popularity of cotton. But now, following the booming
interest in biofuels, palm oil production is increasingwhich
has caused some controversy. 'The World
Rainforest Movement has reported the allocation of
Deilveen JUOUOU and 4UUUOU hectares ot land tor
palm oil produdion in humid southern Benin which,
despite constituting only I Oo/o of national territory
324 -o

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e is home to 500/0 of the country's population. lt says that
such a policy will promote the cultivation of palm oil for
biofuel production on prime agricultural land and lead to
competition with food crops.
Rich pickings
Over half of Benin's Jorest areas have been cleared or
lost to bush fires. Of the forests that remain, mahogany,
iroko, tea( samba, and other tropical hardwoods are
used to make furniture and gifo for the tourist trade.
Off-shore oil reserves discovered in the l96Os have
been largely exploited and imports now far exceed
exports. Other natural resources include marble and
limestone, together with small deposits of gold, but
the mineral industry makes up a small component of the
country's CDB mostly due to undeveloped infrastruclure,
lhis lack of infrastructure and investment means tha!
despite large reserves of natural resources and a historic
and thrivinS cotton industry Benin has been unable to
realize iB economic potential. Only slowly are food
processinS, shrimp, and deep-sea lishing developing as
the private sector takes advantage of a new policy
Student workpoint 26.5
Be an inquirer
Create a table to list five countries that are dependent on a few
(non-oil) commodities for a large proportion of their export revenues,
the commodities they produce, and the share of export revenues
earned from each of the commodities.
There has been a long-run downward trend in commodity prices for
many years caused by a number of factors.
o There have been substantial increases in the supply of
comrnodities, mostly caused by improvements in technology.
For example, there have been huge improvements in
agricultural yields over the last 100 years, caused by better
fertilizers, high degrees oI mechanisation, and scientilic research
into plant disease. Technology has also allowed lor the discovery
of more minerals and also for more efficient mineral extraction.
o The discovery of synthetic replacements for natural commodities,
such as synthetic rubber, man-made fabrics, and plastics replacing
metals, has contributed to the slow increase in demand for the
natural commodities concerned.
o As developed countries have become richer and incomes have
risen, the demand for commodities has not greatly changed,
because their demand is income inelastic. At the same time, as
ilcomes rise, the demand for manufactured goods and services
has increased. Demand for such goods tends to be more ilcome
elastic. This means that the demand for commodities has not risen
as much as the demand for other products.
introduced by the government in 2001 to encourage
investment. Only time will tell whether this kind of
investment can lift one of the world's poorest, yet
resource-rich, countries in the world out of poverty.
26 . Terms of trade f
Soutcei New Agriculturist, vvww.new-ag.info/country/profile.
php?a:389
I Using a negative externalities of production diagram,
explain why the production of cotton may be a
market failure in Benin. Use the term "sustainabiliy
in your written explanation.
2 Research the extent to which shea butter has
become an internationally traded commodity. What
are the advaniages and disadvantages of producing
this product for export?
5 Using a PPC diagram, explain the re-allocation of
resources involved in producing palm oil rather than
food crops. Vvhat are the possible consequences of this?
4 How do you think a lack of infrastructure prevents
Benin from achieving its economic potential?

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26 . Terms of trade
Agricultural policies in developed countries have had a
damaging effect on world agricultural markets. Price support
schemes in the EU and the US, for example, have led to
relatively high prices there and over-production by domestic
producers. These subsidies have also led to over-production.
The over-production is then sold on the world markets, pushing
down agricultural prices. For these reasons, developing
countries often accuse the developed economies of "dumping"
agricultural products on the world market and so ruining their
own agricultural industries.
With huge leaps in technology over the last 50 years, many
products have become smaller. For example, computers that once
took up a whole room are now replaced by laptop computers of
the same power; large tape recorders, the size of a suitcase, are
now replaced by MP3 players the size of a cigarette lighter; and
televisions, which were once housed in large cabinets, are now
replaced by flat screens that require no such housing. This
rniniaturisation of many products and the improvement in
plastics technology has led to a fall in the demand for the
commodities that were traditionally used to make and package
these products.
The effect of the above factors on the average price of commodities
over time is shovrm in Figure 26.3.
We would not want to imply that there has been a fall in demand
for commodities. However, the combination of low income elasticity
of demand, the increased use of synthetic substitutes, and
miniaturisation have led to relatively small increases in demand,
shown as a in Figure 26.3. Improvements in technology along with
the agricultural policies in more developed countries have resulted
in large increases in supply, showr as b in Figue 26.). The result is
that average commodity prices have fallen. This is highlighted in
Figre 26.4.
Given that the TOT index is based on a weighted average of export
prices, those countries that are dependent on commodities will see a
fall in the index of their export prices and deterioration in their terms
of trade.
The deterioration in their TOT resr ts in depreciating current account
deficits. This is because the demand for commodities tends to be
inelastic. For example, although the dernand for copper from Zambia
is likely to be elastic as there are alternative sources of copper,
demand for copper as a whole is inelastic as it is a necessary mineral
in production with few substitutes. This can be said about most
commodities. If you refer back to the revenue box diagram you drew
in workpoint 26.2, you will see that the fall in average export prices
when demand is inelastic results in a fall in expon revenues.
We should also look at the eIlect on imports. with falling export
prices, the price of imports has risen relative to the price of erT)orts.
The goods that developing countries need to import are necessities
such as raw materials, components, and other capital goods. Because
these are not available domestically and are required for economic
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Quanlity of commodities
FiBure 26.3 Falling world commodity
prices
lndexr 1995:loo
25O r
200
r50
100
50+
ti1ure 26.4 Falling commodity prices
a: synthetics ar,miniatuisation
b = lmprovin8
technology and
proteclionism

growth, demand for them is lnelastic. I1 you look back to Lhe revenue
box diagram you drew in workpoint 26.1, you will see that a risc in
import prices when demand for import is inelastic results in an
incrcase in import erpen d itu re.
The delerioration in the TOT lor developing counfies that depend on
commodities has several harmlul consequences.
r Developing countries have to scll more and more exports in order
to buy the same amount of imports. This is harmful enough, but
in order to do this the developing countries then increase supply
and this tends to push commodity priccs down cven more. We
have a vicious circlc.
o Many dcvcloping countries have high levels of indebtedness.
Falling export prices and thus export revenue make it harder to
service their debt. Indeed, in extreme cases, this leads Lo countries
having to increase their borrowing and increasing their levels of
indebtedness. This vicious circlc llnks to Lhe previous one. In
order to pay back their debts, many countries have to increase
Lheir output of the commodities in which they have a
comparatjve advantage. This increases the supply and drives the
prices down.
. In order to increase Lhe supply oI commodities and gain more
export revenue, some developing countries have ovcrused thcir
resources. rcsulting in negative externalities such as land
defaradaLion, dcsertification, soil erosion, and massive
delorestation. This is clearly not sustainable in the long run.
While there is no doubt that the long-run trend in commodity prices
has been downward over the last 50 years, there has bccn a short-run
upward movement in thc last few years, showr in Table 26.4.
2000
2001
2002
2003
20Q4
5J,5
58.3
58,3
65.0
80.5
200s 100.0
2006 120J
2001 135.0
2008 172.1
2009 118.8
2010* l4t J
* Quarter I figures only
source: lnternatlonal ]\,4onetary Fund
52.9
45.6
46.8
54.2
70.8
r00.0
120.5
r33.3
18t.9
115.8
144.4
79.6
75.8
77.3
8r.8
oAz
r00.0
123.2
140.6
151.0
122J
r39.9
81.5
79.0
83.2
88.3
99.4
r00.0
110.3
126.9
156.5
136.0
143.O
26 e Terms of t,ua. @
Iable 26.4 Real primary commodity prices, 2000 l0 327
98,6
95.2
95.0
9s.6
99,5
r00.0
108.8
114.2
I13.3
94.r
lt5.t
62.7
56.3
54.3
60.7
8tJ
100.0
156.2
183.3
168.7
124.4
152.3
11.7
12.6
71.4
15.3
89.2
100.0
136.3
154.3
145.5
109.4
136J
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26 . Terms of rrade
From 1995 to 2001, there had been a fall in the index of all the
primary commodities indices itemized in Table 26.4, with the
exception of petroleum.
From 2002 to 2008, there was a significant increase in the index
oI all primary commodities (column t). Breaking the index into
different categories of commodities, we see that this was the case
for all categories, with the exception of agricultural raw mat€rials,
metals, and petroleum, which peaked in 2007 and fell in 2008.
There were two main reasons for this rise in commodity prices.
First, China joining the WTO at the end of 2001 and the expansion
of the Indian economy led to a massive increase in demand for
commodities of all sorts. Second, the increased demand for
alternative luels (bio-fuels) led to large increases in demand for
many agricultural products.
The global economic crisis, sparked by the sub-prime moftgage crisis
in the USA, began to take effect in 2008 and this can be seen by the
subsequent fall in the indlces for all of the commodity categories in
2009. Howevet by the firsr quarter of 2010, prices were once again
on the up.
Whatever the reasons, the increased commodity prices may give
some short-term help to commodity-expofting developing countries,
although whether the commodity pdce increases will be sustained in
the long run is uncertain. Many economists are predicting a second
global economic crisis, suggesting 2oI3 as the most likely date.
(Depending upon the date that you bought this book, you may know
whether this prediction was true!)
The data also illustrates another problem for commodity-exporting
developing countries. Commodity prices tend to be quite volatile.
As a result, such countries are quite vulnerable to circumstances
beyond their control. The fact that export revenues can fluctuate
significantly can make it diflicult for governments to plan effectively
for the future.
At the outset, we emphasized that not all developing countries are the
same, and we have locused on the problem facing countries that
depend on commodities. If we look back at Table 26.2, we can also
make a link between deteriorating TOT and another group of
developing countries-the countries that are classiJied as manufacturesexporting
LDCs, such as Bangladesh and Nepal. Both of these counfties
depend heavily for their export revenues on the export of low-skill
produced textiles, the prices of which are also dropping. Thus these
countries also experience deteriorating terms of trade.
If we turn to one more group of developing countries-the oil
exporters-we may assume that they have benefited from rising
petroleum priccs. Given the fact that demand Ior oil and petrolcum is
inelastic, we can conclude that their expo revenues will have
increased. whether or not this has been translated into economic
development is quite a different issue.

Be a critical thinker
II you are writing about developing countries, you need to show critical
awareness by noting that you are aware oI the differences that exist
among them. It would be an error to discuss all developing countries as
though they were a group of countries that shared identical
characteristics. This should become clearer in the following chapters.
26. Terms of trade llIE
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