Explain the various concepts of terms of trade. Critically examine the behavior of terms of trade as explained by Prebisch

The terms of trade refer to the ratio at which a country can exchange its exports for imports.

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There are several concepts related to terms of trade:

1. Net Barter Terms of Trade (NBTT): This measures the relative movement in export and import prices. If the NBTT increases, a country can buy more imports with the same quantity of exports, and vice versa.
2. Income Terms of Trade (ITOT): It adjusts the net barter terms of trade for changes in productivity or cost of production. It reflects changes in a country’s real income resulting from shifts in the terms of trade.
3. Single Factoral Terms of Trade (SFTT): It considers changes in the relative prices of a country’s exports and imports in terms of a single factor of production.

Now, regarding Raúl Prebisch’s theory, he argued that developing countries faced a long-term deterioration in their terms of trade. This is known as the Prebisch-Singer hypothesis. According to this, the prices of primary commodities (often exported by developing nations) tend to decline relative to the prices of manufactured goods (often imported by these nations).

The critical examination of Prebisch’s theory involves considering factors such as:

1. Structural Factors: Prebisch attributed the decline in terms of trade to the differing elasticities of demand for primary commodities and manufactured goods. However, structural factors like technological changes, market structures, and supply-side issues also play a role.
2. Globalization: The increasing interconnectedness of the global economy has led to more complex patterns in terms of trade. Factors like international capital flows and changes in global demand patterns have influenced terms of trade.
3. Policy Interventions: Government policies, both domestic and international, can influence terms of trade. Trade barriers, subsidies, and exchange rate policies can impact a country’s position in terms of trade.

In summary, while Prebisch’s theory highlighted challenges faced by developing countries, the contemporary scenario suggests a more nuanced understanding, considering various economic, political, and structural factors that influence the behavior of terms of trade.