Skip to main content
SpringerLink
Log in

Effects of Terms of Trade and its Volatility on Economic Growth: A Cross Country Empirical Investigation

  • World Transition Economy Research
  • Published:
Transition Studies Review

Abstract

This study examines the effects of terms of trade and its volatility on economic growth for a sample of 94 developed and developing countries, using 5 year average annual data from 2004 to 2008. The cross country ordinary least square estimation results indicate significant positive effect of terms of trade on economic growth. Furthermore, volatility of terms of trade has significant positive effect on economic growth. To test the robustness of initial results, sensitivity analysis has been performed using different additional variables, sample size and various proxies of volatility variable. The initial results were found robust despite the inclusion of various variables in the basic model and use of various proxies for volatility of terms of trade.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2
Fig. 3

Similar content being viewed by others

Notes

  1. For time series studies, see Wong (2004, 2010) and Fatima (2010) and for cross sectional studies, see Bleaney and Greenaway (2001) and Cashin and McDermott (2002a, b).

  2. See Prebisch (1950) and Singer (1950).

  3. See Harberger (1950) and Laursen and Metzler (1950).

  4. For detail study of such theories, see Salvatore (2004) pp. 33–37 and pp. 115–146.

  5. These countries were Canada, France, Germany, Italy, Japan, UK, USA, Finland, Switzerland, Denmark, Netherland, India, Korea, Malaysia, Mexico and Srilanka.

  6. The study uses data of 9 industrial countries and 31 developing countries.

  7. They categorize the sample countries according to core and periphery by labor scarcity (measured by the 1913 real wage rate of unskilled urban male workers (purchasing-power-parity adjusted and relative to Britain) and level of development (development, measured by 1913 GDP per capita (in 1990 Geary-Khamis dollars) criteria.

  8. For Australia from 1970:2–1997:2; for Canada (1970:2–1997:4); for New Zealand (1980:2–1997:2); for the United Kingdom (1970:2–1997:4); and for the United States (1973:2–1997:4).

  9. The study includes 19 core and 16 periphery countries.

  10. The core countries are the industrialized countries had rising terms of trade throughout the seven decades and the periphery had no rise and experience long run decline.

  11. These countries were developing and small OECD economies.

  12. The G-7 countries were Canada, France, Germany, Italy, Japan, United Kingdom and United States.

  13. Blattman et al. (2003) has adopted the same method for measurement of volatility.

  14. The web link of data source is http://data.worldbank.org/data-catalog/world-development-indicators.

  15. To check the problem of heteroscedasticity, White heteroscedasticity test has been applied. Test results suggest that heteroscedasticity does not exist in both regression models.

  16. Models with the inclusion of FE, INF, PE and HE variables have 88, 71, 81 and 93 countries respectively.

  17. For 5 year moving average and 5 year moving standard deviation we used annual terms of trade from 2000 to 2008.

References

  • Adeniyi OM, Abiodun LN (2011) Health expenditure and Nigerian economic growth. Eur J Econ Finance Adm Sci (30):125–129

  • Arize A (1996) Cointegration test of a long-run relation between the trade balance and the terms of trade in sixteen countries. N Am J Econ Financ 7:203–215

    Article  Google Scholar 

  • Barro RJ (1996) Determinants of economic growth: a cross-country empirical study. NBER Working Paper 5698

  • Blattman C, Hwang J, Williamson JG (2003) The terms of trade and economic growth in the periphery 1870–1983. National Bureau Economic Research, Working Paper 9940

  • Bleaney M, Greenaway D (2001) The impact of terms of trade and real exchange rate volatility on investment and growth in Sub-Saharan Africa. J Dev Econ 65:491–500

    Article  Google Scholar 

  • Bouakez H, Kano T (2008) Terms of trade and current account fluctuations: the Harberger–Laursen–Metzler effect revisited. J Macroecon 30:260–281

    Article  Google Scholar 

  • Cashin P, McDermott CJ (2002a) The long-run behaviour of commodity prices: small trends and big variability. Int Mone’t Fund Staff Pap 49(2):175–199

    Google Scholar 

  • Cashin P, McDermott CJ (2002b) Terms of trade shock and the current account: evidence from five industrial countries. Open Econ Rev 13:219–235

    Article  Google Scholar 

  • Edwards JA (2007) Dynamics of cross country growth/volatility relationship. Glob Econ J 7(2):1–18

    Google Scholar 

  • Fatima N (2010) Analysis of terms of trade effect for Pakistan, Pakistan Institute of Development Economics. Working Paper 2010:59

  • Goel RK, Ram R (2001) Irreversibility of R&D investment and the adverse effect of uncertainty: evidence from the OECD countries. Econ Lett 71:287–291

    Article  Google Scholar 

  • Hadass YS, Williamson JG (2001) Terms of trade shocks and economic performance, 1870–1940: Prebisch and Singer revisited. National Bureau Economic Research, Working Paper 8188

  • Hamori S (2008) Trade balances and the terms of trade in G-7 countries: penal cointegration approach. Appl Econo Int Dev 8(2):13–22

    Google Scholar 

  • Harberger AC (1950) Currency depreciation, income and the balance of trade. J Polit Econ 58(1):47–60

    Article  Google Scholar 

  • Laursen S, Metzler LA (1950) Flexible exchange rates and the theory of employment. Rev Econ Stat 32:281–299

    Article  Google Scholar 

  • Levine R, Renelt RD (1992) A sensitivity analysis of cross country growth regression. Am Econ Rev 82(4):942–963

    Google Scholar 

  • Lutz M (1999) A general test of the Prebisch-Singer hypothesis. Rev Dev Econ 3(1):44–57

    Article  Google Scholar 

  • Mendoza EG (1997) Terms-of-trade uncertainty and economic growth. J Dev Econ 54:323–356

    Article  Google Scholar 

  • Misztal P (2010) The Harberger–Laursen–Metzler effect. Theory and practice in Poland. Rom Econ J XIII(38):129–146

    Google Scholar 

  • Otto G (2003) Terms of trade shocks and the balance of trade: there is a Harberger–Laursen–Metzler effect. J Int Money Financ 22:155–184

    Article  Google Scholar 

  • Prebisch R (1950) The economic development of Latin American and its principal problems (Lake Success, NY: United Nations, Department of Economic Affairs). Reprinted in Economic Bulletin for Latin America 7(1962):1–22

    Google Scholar 

  • Salvatore D (2004) International economics, 4th edn. McGraw Hill, New York

    Google Scholar 

  • Singer HW (1950) The distribution of gains between investing and borrowing countries. Am Econ Rev 40:473–485

    Google Scholar 

  • Stastny M, Zagler M (2007) Empirical evidence on growth and volatility. EUI Working Paper 2007/22

  • Tsen WH (2009) Terms-of-trade and trade balance: some empirical evidence of Asian economies. Int Trade J 23(4):422–457

    Article  Google Scholar 

  • Wong HT (2004) Terms of trade and economic growth in Malaysia. Labuan Bull Int Bus Financ 2(2):105–122

    Google Scholar 

  • Wong HT (2010) Terms of trade and economic growth in Japan and Korea: an empirical analysis. Empir Econ 38:139–158

    Article  Google Scholar 

  • World Development Indicator (various years)

  • Web Link: http://data.worldbank.org/data-catalog/world-development-indicators

  • Yanikkaya H (2003) Trade openness and economic growth: a cross-country empirical investigation. J Dev Econ 72:57–89

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. IQRA University, Karachi, Pakistan

    Syed Tehseen Jawaid

  2. Department of Economics, University of Karachi, Karachi, Pakistan

    Abdul Waheed

Authors
  1. Syed Tehseen Jawaid
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Abdul Waheed
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Syed Tehseen Jawaid.

About this article

Cite this article

Jawaid, S.T., Waheed, A. Effects of Terms of Trade and its Volatility on Economic Growth: A Cross Country Empirical Investigation. Transit Stud Rev 18, 217–229 (2011). https://doi.org/10.1007/s11300-011-0201-7

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11300-011-0201-7

Keywords

JEL Classification

Search

Navigation