Country terms of trade: Trends, unit roots, over-differencing, endogeneity, time dummies, and heterogeneity
Abstract. The debate about the Prebisch-Singer thesis has focused on
primary commodities with some extensions to manufactures. As we think
that the link between the terms of trade and long-run development,
growth and convergence is the ability of exports to enhance investment
through importing capital goods we analyse trends in country
terms-of-trade for goods and services rather than those for commodities.
Open economy growth models may be observationally equivalent to closed
economy growth models under special conditions where they generate
constant though endogenous terms of trade. We therefore consider trends
in terms of trade for country groups according to the World Bank income
classification. We find that all groups but the poorest have common unit
roots, but none has individual unit roots. As low-income countries have
no unit roots, over-differencing is inefficient and biases significance
levels in first differences against the fall in the terms of trade. For
the low-income countries the terms of trade of goods and services are
falling at a rate that is significantly negative without and with
endogeneity treatment by system GMM. A comprehensive analysis of the
effects of time dummies supports the result of falling terms of trade
for low-income countries. When all coefficients are country-specific 50%
of all low-income countries have falling terms of trade in a
simultaneous equation estimation using the SUR method.
Key words: country terms of trade; Prebisch-Singer thesis; long-run development; World Bank income classification.
JEL-code: F43, O19