Prebisch-Singer Hypothesis
What is Prebisch-Singer Hypothesis?
The Prebisch-Singer hypothesis argues that the long-run terms of trade for primary-commodity exporters tend to deteriorate relative to manufactured-goods exporters.
Developing economies that export raw commodities and import manufactures find that, over time, a given amount of commodities buys fewer manufactured goods. Causes cited include low income elasticity of demand for commodities, technological substitution away from raw materials, and stronger pricing power among manufacturers and their unions. The policy implication Prebisch drew was import-substitution industrialization to reduce dependence on primary exports.
Prebisch-Singer Hypothesis: a worked example
Cobalta exports copper ore and imports tractors. In an early period ore sells for $400 a tonne and a tractor costs $20,000, so 50 tonnes of ore buys one tractor. A generation later ore has risen to $460 and tractors to $29,900, so a tractor now takes 29,900 / 460 = 65 tonnes. Cobalta's export price index is 460 / 400 = 115 and its import price index is 29,900 / 20,000 = 149.5, giving terms of trade of 115 / 149.5 = 0.77. Ore got dearer in money terms, yet Cobalta must ship 30% more of it to bring home the same tractor.
The mistake students make with prebisch-singer hypothesis
The usual misreading is that Prebisch-Singer claims commodity prices fall. The claim is about a ratio. Above, ore rose 15% and the terms of trade still worsened, because tractor prices rose 49.5% over the same stretch. A second misreading expects a smooth yearly slide, so any commodity boom looks like a refutation. The hypothesis describes a slow drift running underneath price swings big enough to bury it for a decade at a stretch, which is why it can only be tested over long spans.
Prebisch-Singer Hypothesis questions
Why would the terms of trade decline for commodity exporters?
The Prebisch-Singer hypothesis gives four reasons why commodity exporters' terms of trade drift downward. Demand for food and raw materials has low income elasticity, so purchases do not keep pace as world incomes grow. Technology substitutes synthetics and trims the material needed per product. Commodity markets are crowded with price-taking sellers while manufacturing is concentrated. And productivity gains in commodities get passed on as lower prices, whereas in manufacturing, firms and unions capture them as profit and pay.
What policy did the Prebisch-Singer hypothesis recommend?
The Prebisch-Singer hypothesis was used to justify import-substitution industrialization: tariffs and quotas on manufactured imports, subsidized credit and infrastructure for domestic factories, and sometimes an overvalued exchange rate to cheapen imported machinery. The aim was to escape dependence on primary exports. Critics answer that small home markets limit the scale a protected factory can reach, and that shelter from competition tends to leave costs high and quality low.
What is the difference between terms of trade and balance of trade?
Terms of trade is a price ratio, the index of export prices divided by the index of import prices, showing how many imports a unit of exports will buy. Balance of trade is a value, exports minus imports over a period, and a country can run a trade surplus while its terms of trade worsen. Prebisch-Singer is a claim about the price ratio, not about surpluses or deficits.
Related terms
Common comparisons
Get AP Econ exam tips in your inbox
Occasional emails with study tips, new interactive graphs, and exam-season reminders. Free, no spam.
No spam. Unsubscribe anytime. Read our privacy policy.
Keep track of what you have studied
A free EconLearn account adds progress tracking, your quiz history, and achievements. Studying here is free either way, and there is nothing to pay for as a student.
Create a free accountAlready have one? Sign in
Last updated