Getting on Good Terms

Abstract

For much of the twentieth century, less developed countries endured deteriorating terms of trade relative to more advanced nations. During that time, a number of explanations emerged to help explain the “unequal exchange” that occurred between rich and poor countries. We revisit these ideas in light of recent data showing more favorable trade terms for a large number of countries in the developing world. Using panel data covering 132 countries during the 1990–2012 period, our analysis considers the importance of trade composition, productive capacity, labor power, foreign capital, factor endowments, and macroeconomic conditions in affecting a country's net barter terms of trade. In addition, we introduce a measure of trade coreness to this field of work, which indicates the relative bargaining power that countries possess during exchange. Our results show that changes in the terms of trade can be attributed to several factors. Most notably, our findings suggest that foreign capital penetration leads to deteriorating terms of trade via its impact on labor conditions, while countries occupying more core-like positions in the international trade network have come to experience more favorable trade terms.