A General Test of the Prebisch-Singer Hypothesis

Abstract

This paper jointly examines the Prebisch-Singer hypothesis of a long-term decline in the relative price of primary commodities and the appropriate framework in which it is tested. A general model is estimated which nests the univariate and bivariate time-series models used in the past literature. The results suggest that the econometric models estimated in the majority of previous studies were misspecified. The evidence strongly supports the Prebisch-Singer hypothesis and rejects recent findings--that the terms of trade are characterized by infrequent negative shocks--in favor of a long-term negative trend.

JEL Classification: C12, L10