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