prebisch singer hypothesis economics

Prebisch-Singer Thesis: Assumptions and Criticisms | Trade | Economics

In this article we will discuss about:- 1. Introduction to Prebisch-Singer Thesis 2. Assumptions in the Prebisch-Singer thesis 3. Criticisms.

Introduction to Prebisch-Singer Thesis:

There is empirical evidence related to the fact that the terms of trade have been continuously moving against the developing countries. On the basis of exports statistics concerning the United Kingdom between 1870 and 1940, Raul Prebisch demonstrated that the terms of trade had secular tendency to move against the primary products and in favour of the manufactured and capital goods.

This viewpoint has been strongly supported by H. W. Singer. The essence of Prebisch-Singer thesis is that the peripheral or LDC’s had to export large amounts of their primary products in order to import manufactured goods from the industrially advanced countries. The deterioration of terms of trade has been a major inhibitory factor in the growth of the LDC’s.

Prebisch and Singer maintain that there has been technical progress in the advanced countries, the fruit of which have not percolated to the LDC’s. In addition, the industrialised countries have maintained a monopoly control over the production of industrial goods. They could manipulate the prices of manufactured goods in their favour and against the interest of the LDC’s.

ADVERTISEMENTS:

Except the success of OPEC in raising the prices of crude oil since mid 1970’s, there has been a relative decline in the international prices of farm and plantation products, minerals and forest products. Consequently, the terms of trade have remained unfavourable to the developing countries.

Assumptions in the Prebisch-Singer thesis:

The main assumptions in the Prebisch-Singer thesis are as under:

(i) As income rises in the advanced countries, the pattern of demand shifts from primary products to the manufactured products due to Engel’s law.

(ii) There is slow rise in demand for products in the developed countries.

(iii) The export market for product of LDC’s is competitive.

(iv) The export market for products of developed countries is monopolistic.

(v) Wages and prices are low in LDC’s.

(vi) The appearance of substitutes for products of LDC’s reduces demand for them.

(vii) The benefit of increased productivity is not passed by the producers of manufactured products in advanced countries to the LDC’s through lower prices.

(viii) The economic growth in the LDC’s is indicated by income terms of trade.

Singer has pointed out that the recent increase in debt problem of the LDC’s has imparted another twist to the hypothesis of secular deterioration of terms of trade for them in two ways. Firstly, a high proportion of proceeds from exports are not available for imports.

Secondly, there is an increased pressure upon the LDC’s to raise exports in order to repay external debts on account of IMF-induced adjustment polices. These pressures make the debt- ridden LDC’s to compete with other poor countries to enlarge their export earnings. It results in decline in the prices of export products of these countries.

Criticisms of Prebisch-Singer Thesis :

The Prebisch-Singer Thesis has come to be criticized on several grounds:

(i) Not Firm Basis for Inference:

The inference of secular deterioration of terms of trade for the LDC’s rests upon the exports of primary vis-a-vis manufactured products. In this regards, it should be remembered that the LDC’s export wide variety of primary products. Sometimes they export also certain manufactured products.

They, at the same time, do not import only manufactured products but also a number of primary products. It is, therefore, not proper to draw a firm inference about terms of trade just on the basis of primary versus manufactured exports.

(ii) Faulty Statement of Gains and Losses of Primary Exporters:

Jagdish Bhagwati has pointed out that the index of terms of trade employed in this thesis understates the gains of exporters of primary products. At the same time, there is over­statement of losses of primary producers.

(iii) Faulty Index of TOT:

The Prebisch- Singer hypothesis rests upon the index, which is the inverse of the British commodity terms of trade. This index overlooks the qualitative changes in products, appearance of new varieties of products, services like transport etc. The generalisation based on British terms of trade for the period 1870 to 1930, according to Kindleberger, is not true for the other developed countries of Europe.

(iv) Neglect of Supply Conditions:

In the determination of terms of trade, the Prebisch-Singer thesis considers only demand conditions. The supply conditions, which are likely to change significantly over time, have been neglected. The relative prices, in fact, depend not only upon the demand conditions but also on the supply conditions.

(v) Little Effect of Monopoly Power:

One of the arguments in support of this thesis was that the higher degree of monopoly power existing in industry than in agriculture led to secular deterioration of terms of trade for the developing countries. In this connection, it was also agreed that the monopoly element prohibited the percolation of benefits of technical progress to the LDC’s. The empirical evidence has not supported such a line of argument.

(vi) Inapplicability of Engel’s Law:

The secular decline in the demand for primary products in developed countries was attributed to Engel’s Law. But this is not true because this law is applicable to food and not to the raw materials, which constitute sizeable proportion of exports from, the LDC’s.

(vii) Benefits from Foreign Investment:

The deterioration of the terms of trade for the LDC’s is sometimes linked not to non-transmission of productivity gains to them by advanced countries through lower prices of manufactured goods, yet the benefits from foreign investments have percolated to the LDC’s through the product innovations, product improvement and product diversification. These benefits can amply offset any adverse effects of foreign investment upon terms of trade and the process of growth.

(viii) Difficult to Assess Variation in Demand for Primary Products:

The secular deterioration in terms of trade of the LDC’s during 1870 to 1930 period was supposed to be on account of the declining world demand for primary products. During that period, there were tremendous changes in world population, production techniques, living standards and means of transport. Given those extensive developments, it is extremely difficult to assess precisely the changes in world demand for primary products and the impact of those changes upon the terms of trade.

(ix) Export Instability and Price Variations:

The Prebisch-Singer thesis suggested that export instability in the LDC’s was basically due to variations in prices of primary products relative to those of manufactured products. Mc Been, on the contrary, held that the export instability in those countries could be on account of quantity variations rather than the price variations.

(x) Development of Export Sector not at the Expense of Domestic Sector:

In this thesis, Singer contended that foreign investments in poor countries, no doubt, enlarged the export sector but it was at the expense of the growth of domestic sector. This contention is, however, not always true because the foreign investments have not always crowded out the domestic investment. If foreign investments have helped exclusively the growth of export sector, even that should be treated as acceptable because some growth is better than no growth. It is far­fetched to relate worsening of terms of trade to the non-growth of domestic sector.

(xi) Faulty Policy Prescription:

Prebisch prescribed the adoption of protectionist policies by LDC’s to offset the worsening terms of trade. Any gains from tariff or non-tariff restrictions upon imports from advanced countries can at best be only short-lived because they will provoke retaliatory actions from them causing still greater injury to the LDC’s.

In the present W.TO regime of dismantling of trade restrictions, Prebisch suggestion is practically not possible to implement. There should be rather greater recourse to export promotion, import substitution, favourable trade agreements and adoption of appropriate monetary and fiscal action for improving the terms of trade in the developing countries.

(xii) Lack of Empirical Support:

The studies made by Morgan, Ellsworth, Haberler, Kindelberger and Lipsey have not supported the secular deterioration of terms of trade hypothesis, Lipsey has observed, “Although there have been very large swings in U.S. terms of trade since 1879, no long term trend has emerged. The average level of U.S. terms of trade since World War II has been almost the same as before World War I.” This objection of lack of empirical support against the Prebisch-Singer hypothesis is actually not very sound. A number of more recent empirical studies have, in fact, gone in favour of this hypothesis.

Despite all the objections raised against the Prebisch-Singer thesis, the empirical evidence has accumulated in support of it. The studies made by UNCTAD for 1950-61 and 1960-73 periods showed that there was a relative decline in the terms of trade of LDC’s vis-a-vis the developed countries. A study attempted by Thirlwall and Bergevin for the period 1973-82 indicated that there was an annual decline of terms of trade of LDC’s for all the primary commodity exports at the rate of 0.36 percent.

On the basis of their study related to exports of manufactured products for LDC’s to the advanced countries during 1970-87 period, Singer and Sarkar found that the terms of trade of LDC’s declined by about 1 percent per annum. Even the World Development Report 1955 recognised that the world prices of primary products declined sharply during I980’s and the terms of trade of LDC’s deteriorated during 1980-93 period.

According to the 1997 Human Development Report of UNDP, the terms of trade for the least developed countries declined by a cumulative 50 percent over the past 25 years. According to South Commission, compared with 1980, the terms of trade of developing countries had deteriorated by 29 percent in 1988. The average real price of non-oil commodities had declined by 25 percent during 1980-88 period compared with the previous two decades. The terms of trade of non-oil developing countries had deteriorated during 1980-88 period by 8 percent compared with 1960’s and 13 percent compared with 1970’s.

Related Articles:

• Reasons for Secular Deterioration of Terms of Trade | Economics
• Single Factorial Terms of Trade (With Criticisms) | Economics
• Export Pessimism: Nurkse’s Version and Testing | International Economics
• Income Terms of Trade (With Criticisms) | Economics

Reference Library

Collections

• See what's new
• All Resources
• Student Resources
• Assessment Resources
• Teaching Resources
• CPD Courses
• Livestreams

Study notes, videos, interactive activities and more!

Economics news, insights and enrichment

Currated collections of free resources

Browse resources by topic

• All Economics Resources

Resource Selections

Currated lists of resources

Study Notes

The Prebisch Singer Hypothesis

Last updated 15 Jul 2024

• Share on Facebook
• Share on Twitter
• Share by Email

This study note for A Level and IB economics considers the Prebisch Singer Hypothesis

The Prebisch-Singer Hypothesis, formulated in the mid-20th century by Raúl Prebisch and Hans Singer, posits that the terms of trade for primary commodities relative to manufactured goods tend to deteriorate over time. This hypothesis has significant implications for the economic development of countries reliant on primary commodity exports.

Key Components of the Prebisch-Singer Hypothesis

• Terms of trade refer to the ratio of export prices to import prices. A deterioration means that a country has to export more to import the same amount of goods.
• According to the hypothesis, the terms of trade of primary commodities decline relative to manufactured goods over time.
• Technological Progress: Technological advancements in manufacturing lead to productivity gains that are not mirrored in the primary commodities sector.
• Income Elasticity of Demand: Demand for manufactured goods grows more rapidly than for primary commodities as incomes rise.
• Market Structure: Primary commodity markets tend to be more competitive, while manufacturing markets can be more oligopolistic, allowing firms to retain more benefits from productivity improvements.
• Countries that rely heavily on exporting primary commodities face declining terms of trade, reducing their ability to import necessary goods for development.
• This can lead to persistent trade deficits and hinder economic growth.

Application of the Prebisch-Singer Hypothesis

• In the mid-20th century, many Latin American countries experienced declining terms of trade, validating Prebisch's observations and leading to policy shifts towards industrialization and import substitution.
• Many Sub-Saharan African countries still rely on primary commodities and face similar issues with terms of trade deterioration, affecting their economic stability and growth prospects.

Contributions of Key Economists

• An Argentine economist who observed the adverse effects of declining terms of trade on Latin American economies and advocated for structural economic changes.
• A German-born British economist who independently reached similar conclusions about the long-term decline in commodity terms of trade and its impact on developing countries.
• Contributed to structuralist economic thought, emphasizing the need for industrialization in developing countries to overcome dependency on primary commodities.
• Critiqued neoclassical economics and contributed to the understanding of economic development issues, supporting the need for diverse economic strategies in developing countries.

Timeline of Key Economic Events and Policy Responses

• 1950: Publication of Prebisch's and Singer's seminal works on the declining terms of trade.
• 1950s-1960s: Latin American countries adopt import substitution industrialization (ISI) policies.
• 1970s: OPEC oil embargo highlights the vulnerability of primary commodity-dependent countries to terms of trade shocks.
• 1980s-1990s: Shift towards neoliberal policies and structural adjustment programs in many developing countries.
• 2000s: Rising commodity prices temporarily reverse terms of trade trends, but concerns about long-term sustainability persist.

Critique of the Model

• Empirical Validity: Some studies have shown periods where the terms of trade for primary commodities improved, challenging the hypothesis.
• Policy Implications: Import substitution industrialization (ISI) policies inspired by the hypothesis often led to inefficiencies and economic distortions.
• Simplistic Dichotomy: The model's focus on primary commodities vs. manufactured goods oversimplifies the complexity of global trade.
• Neglect of Services: The rise of the services sector in both developed and developing countries is not addressed by the hypothesis.
• Import Substitution Industrialization (ISI): A trade and economic policy which advocates replacing foreign imports with domestic production.
• Income Elasticity of Demand: The responsiveness of the demand for a good to a change in income.
• Oligopolistic Market: A market structure in which a few firms dominate the market.
• Primary Commodities: Raw materials and agricultural products that are typically exported by developing countries.
• Terms of Trade: The ratio of export prices to import prices.

Essay-Style Questions

• Discuss the main arguments of the Prebisch-Singer Hypothesis and its implications for developing countries.
• Evaluate the empirical evidence for and against the Prebisch-Singer Hypothesis.
• How did the Prebisch-Singer Hypothesis influence economic policies in Latin America in the mid-20th century?
• Analyze the relevance of the Prebisch-Singer Hypothesis in the context of the modern global economy.
• Compare and contrast the Prebisch-Singer Hypothesis with the Dependency Theory of economic development.

Recommended Articles and Papers

• Prebisch, R. (1950). "The Economic Development of Latin America and its Principal Problems." United Nations. https://repositorio.cepal.org/...
• Singer, H. W. (1950). "The Distribution of Gains between Investing and Borrowing Countries." American Economic Review, 40(2), 473-485. http://www.jstor.org/stable/18...
• Furtado, C. (1970). "Economic Development of Latin America: A Survey from Colonial Times to the Cuban Revolution." Cambridge University Press. https://www.cambridge.org/core...
• Thirlwall, A. P. (2011). "Economics of Development: Theory and Evidence." Palgrave Macmillan. https://www.palgrave.com/gp/bo...
• Ghosh, J. (2003). "Economic Globalization and Developing Countries: Which Way Now?" Economic and Political Weekly, 38(35), 3709-3711. http://www.jstor.org/stable/44...

These notes provide a comprehensive overview of the Prebisch-Singer Hypothesis, its key components, applications, critiques, and contributions from notable economists. They also offer additional resources, potential essay questions, and a glossary to deepen students' understanding of the topic.

• Prebisch-Singer Hypothesis
• Raul Prebisch

You might also like

Prebisch singer hypothesis.

Brazilian coffee farmers look to move up market

2nd October 2015

A2 Data Response on Brazilian Economy (June 2013)

Exam Support

Barriers to Development - KAA and Evaluation Paragraphs

Topic Videos

Why is vanilla so expensive - A Level economics in six minutes

16th May 2019

Markets in Action - Cocoa Price Volatility

The latin american development model, growth and development profile - zambia, our subjects.

• › Criminology
• › Economics
• › Geography
• › Health & Social Care
• › Psychology
• › Sociology
• › Teaching & learning resources
• › Student revision workshops
• › Online student courses
• › CPD for teachers
• › Livestreams
• › Teaching jobs

Boston House, 214 High Street, Boston Spa, West Yorkshire, LS23 6AD Tel: 01937 848885

• › Contact us
• › Terms of use
• › Privacy & cookies

© 2002-2024 Tutor2u Limited. Company Reg no: 04489574. VAT reg no 816865400.

Quickonomics

Prebisch–Singer Hypothesis

Definition of the prebisch–singer hypothesis.

The Prebisch–Singer hypothesis is a theory in economics that suggests that the terms of trade between primary products and manufactured goods tend to deteriorate over time. This theory, posited by Raúl Prebisch and Hans Singer in the late 1940s and early 1950s, respectively, argues that countries that export commodities (a term closely associated with primary products) will become relatively poorer in comparison to those that export manufactured goods. The hypothesis is based on the observation that the income elasticity of demand for primary products is lower than that for manufactured goods. Thus, in a growing global economy, the prices for primary products will increase at a slower rate than those for manufactured goods, leading to a decline in the terms of trade for countries specializing in the export of commodities.

Consider two countries: Country A specializes in the production and export of copper, a primary commodity, while Country B specializes in the production and export of electronic gadgets, a manufactured product. As the global economy expands, the demand for electronic gadgets (with high-income elasticity) grows faster than the demand for copper (with lower income elasticity). Over time, the price of electronic gadgets increases more rapidly than the price of copper. Consequently, for Country A to purchase the same amount of electronic gadgets from Country B, it needs to export more copper than before. This illustrates the deteriorating terms of trade for Country A, as represented by the Prebisch–Singer hypothesis.

Why the Prebisch–Singer Hypothesis Matters

The Prebisch–Singer hypothesis has significant implications for trade policies and economic development strategies, especially for countries heavily reliant on the export of primary products. It supports the argument for these countries to diversify their economies and to develop their manufacturing sectors. The hypothesis also underpins the rationale for economic policies aimed at protecting infant industries and reducing dependency on commodity exports. It highlights the vulnerability of commodity-exporting countries to volatile global market conditions and the potential benefits of economic diversification and value addition.

Frequently Asked Questions (FAQ)

What are the main criticisms of the prebisch–singer hypothesis.

The Prebisch–Singer hypothesis has faced criticism on several fronts. Critics argue that it oversimplifies the dynamics of international trade by not accounting for factors such as technological progress and productivity gains in the primary sector, which can influence the terms of trade. Others suggest that the hypothesis underestimates the capacity of commodity-exporting countries to diversify their economies and to upgrade their production processes. Additionally, some economists have highlighted empirical evidence showing periods during which the terms of trade for primary products improved, contrary to what the hypothesis predicts.

How have some countries responded to the challenges highlighted by the Prebisch–Singer hypothesis?

Some countries have taken proactive steps to mitigate the challenges highlighted by the Prebisch–Singer hypothesis through policies aimed at economic diversification and industrialization. This includes investing in education and technology to improve productivity and competitiveness, implementing policies to support the growth of the manufacturing sector, and pursuing value-added processing of primary products. Countries have also engaged in regional trade agreements to enhance market access for their manufactured goods and reduce dependence on commodity exports.

How does the Prebisch–Singer hypothesis relate to the concept of sustainable development?

The Prebisch–Singer hypothesis is relevant to discussions of sustainable development, particularly in how it underscores the need for economic diversification and resilience in the face of global market volatility. By highlighting the risks associated with over-reliance on primary commodity exports, the hypothesis indirectly points to the importance of pursuing economic development strategies that are environmentally sustainable, economically viable, and socially inclusive. This includes promoting industries that not only generate economic growth but also contribute to environmental conservation and social well-being.

In conclusion, the Prebisch–Singer hypothesis has played a pivotal role in shaping economic thinking and policy-making related to international trade and development. Despite criticisms and challenges to its empirical validity, the core message of promoting economic diversification and reducing dependency on volatile commodity markets remains highly relevant, especially for developing countries seeking to achieve sustainable and inclusive economic growth.

To provide the best experiences, we and our partners use technologies like cookies to store and/or access device information. Consenting to these technologies will allow us and our partners to process personal data such as browsing behavior or unique IDs on this site and show (non-) personalized ads. Not consenting or withdrawing consent, may adversely affect certain features and functions.

Click below to consent to the above or make granular choices. Your choices will be applied to this site only. You can change your settings at any time, including withdrawing your consent, by using the toggles on the Cookie Policy, or by clicking on the manage consent button at the bottom of the screen.

Terms of Trade and Economic Development

• Reference work entry
• First Online: 01 January 2018
• pp 13562–13566
• Cite this reference work entry

• H. W. Singer 1  

68 Accesses

One of the most widely discussed theories concerning the terms of trade of developing countries is the Prebisch–Singer hypothesis, independently published in 1950 (Prebisch 1950; Singer 1950). This hypothesis proclaimed a structural tendency for the terms of trade of developing countries to deteriorate in their dealings with industrial countries. In the original form this related mainly to the terms of trade between primary commodities and manufactured goods from the industrial countries. The historical statistical basis was an analysis of British terms of trade during the period 1873–1938 which corresponded to this image of exports of manufactured goods in exchange for primary commodities.

This is a preview of subscription content, log in via an institution to check access.

Access this chapter

Subscribe and save.

• Get 10 units per month
• Download Article/Chapter or eBook
• 1 Unit = 1 Article or 1 Chapter
• Cancel anytime
• Available as PDF
• Read on any device
• Instant download
• Own it forever
• Available as EPUB and PDF
• Durable hardcover edition
• Dispatched in 3 to 5 business days
• Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Institutional subscriptions

Similar content being viewed by others

Terms-of-Trade and Underdevelopment: How to Benefit from Improving Terms-of-Trade: A Discussion of the Link Between Terms-of-Trade and the Development Blocking Internal Social and Economic Structures

How the EPA Promotes Economic Development

Trade, Trade Policy and Development

Bibliography.

Ellsworth, P.T. 1956. The terms of trade between primary producing and industrial countries. Inter-American Economic Affairs 10: 47–65.

Google Scholar  

Emmanuel, A. 1972. Unequal exchange . New York/London: Monthly Review Press.

Furtado, C. 1964. Development and underdevelopment . Berkeley: University of California Press.

Haberler, G. 1961. Terms of trade and economic development. In Economic development for Latin America , ed. H.S. Ellis. London: Macmillan.

Keynes, J.M. 1938. The policy of government storage of foodstuffs and raw materials. Economic Journal 48: 449–460.

Article   Google Scholar  

Lewis, W.A. 1954. Economic development with unlimited supplies of labour. Manchester School of Economics and Social Studies 22: 139–191.

Morgan, T. 1959. The long-run terms of trade between agriculture and manufacturing. Economic Development and Cultural Change 8: 1–23.

Prebisch, R. 1950. The economic development of Latin America and its principal problems . New York: UN Economic Commission for Latin America.

Sapsford, D. 1985. The statistical debate on the net barter terms of trade between primary commodities and manufactures: A comment and some additional evidence. Economic Journal 95(379): 781–788.

Seers, D. 1983. The political economy of nationalism . Oxford: Oxford University Press.

Singer, H.W. 1950. The distribution of gains between investing and borrowing countries. American Economic Review 40: 473–485.

Spraos, J. 1980. The statistical debate on the net barter terms of trade between primary commodities and manufactures. The Economic Journal 90(357): 107–128.

Spraos, J. 1983. Inequalising trade? Oxford: Clarendon Press.

Spraos, J. 1985. A reply. Economic Journal 95(379): 789.

Thirlwall, A.P. 1983. Growth and development, with special reference to developing economies , 3rd ed. London: Macmillan.

Book   Google Scholar  

Todaro, M.P. 1969. A model of labour migration and urban unemployment in less developed countries. American Economic Review 59(1): 138–148.

Viner, J. 1953. International trade and economic development . Oxford: Clarendon Press.

Download references

Author information

Authors and affiliations.

http://link.springer.com/referencework/10.1007/978-1-349-95121-5

H. W. Singer

You can also search for this author in PubMed   Google Scholar

Editor information

Copyright information.

© 2018 Macmillan Publishers Ltd.

About this entry

Cite this entry.

Singer, H.W. (2018). Terms of Trade and Economic Development. In: The New Palgrave Dictionary of Economics. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-349-95189-5_1612

Download citation

DOI : https://doi.org/10.1057/978-1-349-95189-5_1612

Published : 15 February 2018

Publisher Name : Palgrave Macmillan, London

Print ISBN : 978-1-349-95188-8

Online ISBN : 978-1-349-95189-5

eBook Packages : Economics and Finance Reference Module Humanities and Social Sciences Reference Module Business, Economics and Social Sciences

Share this entry

Anyone you share the following link with will be able to read this content:

Sorry, a shareable link is not currently available for this article.

Provided by the Springer Nature SharedIt content-sharing initiative

• Publish with us

Policies and ethics

• Find a journal
• Track your research