Premium
What Can Account for Fluctuations in the Terms of Trade? *
Author(s) -
Baxter Marianne,
Kouparitsas Michael A.
Publication year - 2006
Publication title -
international finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.458
H-Index - 39
eISSN - 1468-2362
pISSN - 1367-0271
DOI - 10.1111/j.1468-2362.2006.00034.x
Subject(s) - economics , volatility (finance) , diversification (marketing strategy) , international economics , monetary economics , terms of trade , international trade , econometrics , business , marketing
This paper studies the sources of terms of trade volatility. We decompose the terms of trade into two components. The ‘goods price’ component stems from differences in the composition of import and export baskets, while the ‘country price’ component stems from deviations from the law of one price. Countries are classified according to their major import and export goods: commodities, manufactured goods and fuels. Except fuel exporters, there is roughly equal importance of goods price vs country price volatility. These results suggest that there may be a role for reducing terms of trade volatility through diversification of a country's exports.