Prices and Terms of Trade for Developed Country Exports of Manufactured Goods

Abstract

The subject of the terms of trade between manufactured goods and primary products has a long history, and opinions on the direction of trends in them have gone through several cycles. Recently, and until the last few years, the majority opinion, especially in developing countries and in agencies representing their views, has been that manufactured goods have generally risen in price over the past century or so. This was true, despite the fact that such a rise would have violently contradicted one of the most firmly held and basic beliefs of classical economics. That was that as a consequence of diminishing returns-of rising population pressing against a constant supply of resources, especially land—there must in the long run be a rise in primary goods prices, especially agricultural prices, relative to the prices of manufactured goods. For example:

The tendency, then, being to a perpetual increase in the productive power of labour in manufactures, while in agriculture and mining there is a conflict between two tendencies, the one towards an increase of productive power, the other towards a diminution of it, the cost of production being lessened by every improvement in the processes, and augmented by every addition to population; it follows that the exchange value of manufactured articles, compared with the products of agriculture and of mines, have, as population and industry advance, a certain and decided tendency to fall. (Mill, 1848, Book IV, Ch. II).

This paper was prepared mainly as part of a National Bureau of Economic Research study of the Indexing of Commodity Prices, financed by Grant no. APR77–06822 from the National Science Foundation. It draws also on work under NSF Grant No. SES-7925724 on Export Growth, Export Prices and the Supply of Exports. We are indebted to Linda Molinari, with assistance from Kathy Lembo and Vanessa Kooby, for programming and data collection; to Robert J. Gordon for the use of unpublished price data, and to Muriel Moeller for the preparation of the manuscript. Several of the participants in the conference (particularly Graham Hall, T. S. Khachaturov, Alfred Maizels, Pedro Malan, Katma Prasad, Sir Austin Robinson and J. R. Wells) made useful comments and suggestions. The research reported here is a part of the National Bureau of Economic Research Programme in International Studies. However, this is not an official report of the National Bureau; it has not undergone the review accorded official NBER publications; in particular, it has not been submitted for approval by the Board of Directors. Any opinions expressed are those of the authors, and do not necessarily represent those of the National Bureau or the National Science Foundation.