Country Terms of Trade 1960-2012: Trends, unit roots, over-differencing, endogeneity, time dummies, and heterogeneity

The debate about the Prebisch-Singer thesis has focused on primary commodities with some extensions to manufactured goods. We analyse trends in country terms-of-trade for goods and services rather than those for commodities according to the World Bank income classification. We find that the natural logarithm of the terms of trade for all groups except for the poorest has 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 per cent of all low-income countries have falling terms of trade in a simultaneous equation estimation using the SUR method. Food crisis and financial crisis have no effect on the number of countries with falling terms of trade, but improve or dis-improve the terms of trade for a very small number of countries. Key words country terms of trade; Prebisch-Singer thesis; long-run development; World Bank income classification