Clyde WTN
Commodity Terms of Trade
We utilise nation-commodity trade data from the United Nations Comtrade database, the World Trade Organization, and specific country government databases. The database contains yearly nation export and import values for over 2,600 different products.
The fact that some of the indices in this database are generated using time-varying weights distinguishes them from the majority of those in previous research. To that aim, having a comprehensive coverage of commodity trading across time is critical.
To avoid this problem, we employ Comtrade bilateral trade data at the commodity level. We use a multi-pronged strategy, but in most situations, we rely on trade flows reported by trading partners.
We associate each commodity price with all product codes that correspond to the unprocessed commodity as well as goods that, while partly processed, we predict to have a significant correlation with the main commodity's price.
Additional country-specific commodity price indexes are also included in the database, which may be useful for answering other queries. Commodity terms of trade are determined by indexing export and import prices. However, they do not account for changes in the quality and mix of commodities traded between two nations. The commodity terms of trade index, at best, reflects changes in the relative prices of products exported and imported in the base year.
Commodity terms of trade are acceptable if a country's balance of payments exclusively comprises exports and imports of commodities and services, and the balance of payments balances in the base and provided years.
Thus, net barter terms of trade fail to account for substantial changes in the quality of products that occur across the world, as well as new items that join international commerce on a regular basis.
The issue arises in choosing the period frame over which the trade terms are analysed and compared. If the period is sufficiently short, the difference between the base date and the present may be indistinguishable. If the time is too lengthy, the structure of the country's commerce may have changed, and the export and import commodity content may no longer be comparable between the two dates.
The problem with trade is that it just displays changes in export and import prices, not how such prices vary. In reality, there is a significant qualitative difference when a change in the commodity terms of trade index is produced by a change in export prices compared to import prices as a result of changes in export demand abroad and ways of productivity at home.
The idea of commodity terms of trade sheds little light on a country's "capacity to import." Assume that the commodity terms of trade in India decrease. It indicates that a given amount of Indian exports will purchase a lesser amount of imports than before.
Commodity trade terms also overlook changes in a country's production efficiency. Assume a country's production efficiency rises. It will lower the cost of manufacturing and the prices of its export items.
The decline in export prices will be reflected in the deterioration of its commodity terms of trade. However, the country will not be worse off than it was before. Even if a certain value of exports results in less imports, the country will be better off. This is due to the fact that a given amount of exports can now be produced with less resources, and the true cost of imports
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