Working Paper: CEPR ID: DP90
Authors: Heywood Fleisig; Sweder van Wijnbergen
Abstract: An empirical stylized fact is that primary exporters' terms of trade worsen when the dollar appreciates and improve when the dollar depreciates. In our theoretical analysis, we demonstrate that an appreciation of the dollar will worsen a primary exporter's terms of trade, the smaller the United States share in the world market for the primary commodity, the lower the United States demand elasticity for that good, and the larger the United States share in the exporter's imports. We present empirical findings that support the theoretical analysis. We also find strong evidence of the cyclical sensitivity and the secular decline of real commodity prices.
Keywords: primary producers; terms of trade; dollar appreciation; real commodity prices; cyclical and secular movements
JEL Codes: 410
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| real appreciation of the dollar (F31) | worsening terms of trade for primary product exporters (F14) |
| smaller U.S. market share and lower demand elasticities (F61) | stronger effects on terms of trade (F14) |
| 10% real appreciation of the dollar (F31) | 6% decline in commodity prices in terms of U.S. goods (Q02) |
| 1 percentage point decrease in OECD unemployment (F66) | 15% increase in real commodity prices (Q02) |
| secular decline in real commodity prices (Q02) | downward trend of approximately 7% per year (P27) |