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terms of trade

  Ratios of prices, volumes, values, or productivities of factors of production embodied within goods traded in exchange. Modifications may be made to indices to distinguish between price changes resulting from changes in costs and changes in demand, and to indicate the effect of the volume of trade upon national income. Improvements/deteriorations in the terms of trade are said to occur when the indices favour goods being sold/bought.

Contrary to notions of trade based on theories of comparative advantage whereby technical change in the core countries would reduce the price of industrial exports so enabling primary exporters to buy larger and larger quantities of industrial imports with given levels of primary exports, the Prebisch-Singer hypothesis states that long-run terms of trade tend to move against primary producers (see, e.g. Mathur, 1991). This is due in part to the low income elasticity of demand for primary products, along with relatively sluggish growth in demand for them, especially in comparison with manufactures and services; technical progress concentrated in industrialized regions enabling reductions in demand for primary commodities; and competitive conditions of supply facing monopsonistic tendencies of demand. Furthermore, the prices of primary products tend to fluctuate over greater amplitudes than those of manufactures because the price elasticity of supply is also low. Such relationships tend to hold back the development of primary producers and lead to policy prescriptions to increase the amount of value added to commodities — to retain or add more of the chain of production within the regions of their production — and so to industrialization within the primary producing regions.

However, although classically applied to the economic characteristics of different kinds of commodities, a pronounced geography of power also shapes terms of trade. The political economy of the geography of the globalizing circuit of capital not only underpins quantitative imbalances in control over supply and demand for commodities but promotes norms of evaluation founded upon capitalist rationalities applied to sectors of economic activity in the cores which are then imposed upon peripheries (see core-periphery model) and their economic activities. Such manoeuvres shape discourses of developmentalism (see development) and urban/rural bias (see, e.g. Corbridge, 1982) in developmental strategies as one, largely unquestioned but highly specific, set of concepts of development, is spread through the \'logic\' of market exchange and so constrains both thought and practice. (RL)

References Corbridge, S. 1982: Urban bias, rural bias and industrialization : An appraisal of the work of Michael Lipton and Terry Byres. In J. Harriss, ed., Rural development: theories of peasant economy and agrarian change. London: Hutchinson. Mathur, P.N. 1991: Why developing countries fail to develop. London: Macmillan.



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