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Friday, 3 June 2011

Explain the Prebisch Singer Hypothesis

(Since i had no idea what this was, i thought i should maybe do a bit of research on it).

The Prebisch Singer hypothesis is an economic theory developed by Raul Prebisch and Hans Singer. The theory states that the terms of trade between primary goods and manufactured products deteriorate over time. What this means is that countries that export primary goods that do not have the means to manufacture goods to export will lose out in the long-run, as their goods will become relatively cheaper than the manufactured ones. A common explanation for the phenomenon is the observation that the income elasticity of demand for manufactured goods is greater than that for primary products - especially food. Therefore, as incomes rise, the demand for manufactured goods increases more rapidly than demand for primary products.

The worry with this is that the main exporters of primary goods are developing countries. If we take this hypothesis as fact, then that does not bode well for developing countries because it means that any hope of ever industrialising without borrowing large amounts (which is hard with a low credit rating) are slim - as they will not be making much profit on their exports, while being faced with higher costs of imports. 

8 comments:

  1. "The theory states that the terms of trade between primary goods and manufactured products deteriorate over time"

    Look at the current predictions over food prices - rises of 30% or so.

    Look at the global recession. Prices of manufactured goods stabilised/fell.

    Does this suggest that - at least over the last few years - the hypothesis is wrong?

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  2. We can assume that, like most things in economics, it would be a trend over a long period of time, rather than a constant reduction in prices year on year.

    (You set me up quite nicely for this one)... The theory quite clearly states that "As incomes rise over time, the demand for manufactured goods increase". During a recession, incomes are not rising; they are, in fact, falling.. This, therefore, is like an exception that proves the rule.

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  3. During a recession incomes are not rising...?

    Paragraph 5, Executive Summary, second sentence:

    http://www.ifs.org.uk/comms/comm118.pdf

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  4. Well, during a recession incomes shouldn't be rising, as a reduction in GDP equates to a reduction in incomes.

    Perhaps the explanation for that is that benefits are higher..? Or the coalition's bottom-rate tax reductions

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  5. Ahhh so we're talking about disposable income? So incomes fall but if tax falls more then incomes rise?

    Is the UK in a recession/

    If so....are incomes falling?

    I gave you the link!

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  6. Incomes rise...demand for manufactured goods rises.

    Not rocket science...

    Then of course there's Engel's curve....

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  7. The hypothesis is not a fact but an observation... We saw a turnaround in the 2000s commodity boom for developing countries

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  8. As always the key factor is consumer/industrialists confidence and expectations if they expect growth and prosperity then dd for manufactures will indeed rise faster than income (due to borrowing).

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