Free Falling Terms of Trade Despite Industrialization: The Case of Bangladesh

BDRWPS 33, September 2017

21 Pages Posted: 16 Oct 2017

See all articles by Bernhard G. Gunter

Bernhard G. Gunter

Bangladesh Development Research Center (BDRC); American University - Department of Economics

Valeria Vargas

Bangladesh Development Research Center

Date Written: September 30, 2017

Abstract

Considering Bangladesh’s successful industrialization, Bangladesh’s sharply deteriorating terms of trade (ToT) are a puzzle for the original Prebisch-Singer hypothesis. The Prebisch-Singer hypothesis suggested that countries exporting primary products will experience deteriorating ToT, while countries exporting manufacturing goods will experience ToT improvements. This paper provides an empirical review of Bangladesh’s ToT from 1980 to 2013. It reviews the theoretical literature explaining the Prebisch-Singer hypothesis and uses econometric analyses to determine some of the key factors for Bangladesh’s ToT deterioration. It shows that exchange rate devaluations and increases in export quantity have a negative impact on the ToT, while improvements in export quality have some positive impact on the ToT. In the case of Bangladesh, the problem however is that export quality has been decreasing, contributing to sharply falling ToT. The key policy implication is that export promotion policies need to be refined, focusing also on export quality, not only export quantity.

Keywords: Terms of trade, export quality, industrialization, Bangladesh

JEL Classification: O14, O24, O47

Suggested Citation

Gunter, Bernhard G. and Vargas Sejas, Valeria, Free Falling Terms of Trade Despite Industrialization: The Case of Bangladesh (September 30, 2017). BDRWPS 33, September 2017. Available at SSRN: https://ssrn.com/abstract=3053657 or http://dx.doi.org/10.2139/ssrn.3053657

Bernhard G. Gunter (Contact Author)

Bangladesh Development Research Center (BDRC) ( email )

2508 Fowler Street
Falls Church, VA 22046-2012
United States

American University - Department of Economics ( email )

4400 Massachusetts Avenue, N.W.
Washington, DC 20016-8029
United States

HOME PAGE: http://www.american.edu/cas/faculty/gunter.cfm

Valeria Vargas Sejas

Bangladesh Development Research Center ( email )

2508 Fowler Street
Falls Church, VA 22046-2012
United States

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