Economics • Economic BasicsHard
In the context of international trade theory, what does the 'Prebisch-Singer Hypothesis' assert regarding developing nations exporting primary commodities?
A. Their terms of trade tend to deteriorate over the long term relative to manufactured goods from developed nations.✓ Correct Answer
B. Their export earnings automatically stabilize due to inelastic global demand for agricultural produce.
C. Their comparative advantage shifts permanently toward capital-intensive technology within a decade.
D. Their balance of payments surpluses consistently outpace those of industrialized manufacturing nations.
💡 Solution & Explanation
The Prebisch-Singer hypothesis posits that the terms of trade for developing countries, which primarily export primary commodities, deteriorate over time compared to developed countries exporting manufactured goods. This occurs because the income elasticity of demand for primary products is lower than that for manufactured goods. Consequently, developing nations must export increasingly larger volumes of primary goods to purchase the same volume of manufactured imports.
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