Transformations  in
Business & Economics

TERMS OF TRADE IMPACT ON INTERNATIONAL TRADE: A PANEL COINTEGRATION ANALYSIS
Marinko Skare, Daniel Tomic, Ivan Kristek

ABSTRACT. Changes in the country's term of trade can have significant effects on its balance of trade and its economic growth. Thus, the terms of trade are widely used as an indicator of the benefits derived by the country from international trade. The trend decline/rise in terms of trade has often been accompanied by considerable volatility in commodity prices, selected macroeconomic and international policy with short- vs. long-run economic goals, tariff reforms, reduction of non-tariff barriers, export incentives, liberalisation of foreign capital transactions on international markets. The problem lies in the fact that inherent volatility in export and import prices (terms of trade) often makes the detection of macroeconomic trends difficult. In that manner, the goal of this paper is to evaluate the impact of recent movements in terms of trade on the trade of goods and trade of services.
Particularly, do terms of trade have a positive or negative impact on international trade? We base empirical research on panel cointegration analysis that utilises annual data on the terms of trade, trade in goods, and trade in services over the period 1995-2017 for the selected most developed countries. A causal relationship between the variables appears to be consistent in the short- and long-run across the panel, suggesting that recent terms of trade movements enhance international trade .

KEYWORDS:  terms of trade, international trade, panel cointegration analysis, developed countries.

JEL classification:  E39, C33, F14, F62.