FACTORS RESPONSIBLE FOR DETERIORATION IN THE TERMS OF TRADE OF LESS DEVELOPED COUNTRIES

GHOLAM REZA GHORASHI, Fordham University

Abstract

This study concerns deterioration hypotheses. These theories have generated three major questions: Has there been a systematic bias against LDC terms of trade? What factor(s) are responsible for such a bias? And, what shall be done about these damages?^ The literature reveals that the controversy over the first question if far from over. The controversy concerns the existence of an absolute deterioration in LDCs barter terms of trade. This study uses an alternative approach. We measure both barter and income terms of trade of 34 LDCs and 12 DCs from 1950-1980. We also break this period into three sub-periods and repeat the measurements. We then compute and compare their average. Based on this comparison, we conclude that "deteriorationists" have a valid case.^ There are several theoretical explanations of the deterioration in LDC terms of trade, but few prove their point empirically. This is our second task. We first offer a theoretical explanation for the five major structural factors cited in the literature as possible causes of deterioration. We assume that while each factor has some impact on the trend of the terms of trade, no single factor is solely responsible for deterioration. We then build a model to relate these structural aspects to the trend in LDC terms of trade and explain the proxy variables used to represent them. The empirical work that follows is based on this model and consists of a set of regression equations, OLS as well as TSLS, and a rank correlation.^ Finally, after summarizing the empirical results, we conclude that the deteriorating trend in LDCs terms of trade vis-a-vis DCs is due to their differing economic structures. Brief remarks about policy implications suggest that an effective policy to combat the worsening trend in LDCs terms of trade must be directed toward the structural factors responsible for this trend. ^

Subject Area

Economics, Theory

Recommended Citation

GHOLAM REZA GHORASHI, "FACTORS RESPONSIBLE FOR DETERIORATION IN THE TERMS OF TRADE OF LESS DEVELOPED COUNTRIES" (January 1, 1986). ETD Collection for Fordham University. Paper AAI8615738.
http://fordham.bepress.com/dissertations/AAI8615738

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