Prebisch-Singer hypothesis
Topic: International Trade Policy, WTO and Intellectual Property · NCERT: Beyond NCERT
Meaning
The Prebisch-Singer hypothesis (Raúl Prebisch and Hans Singer, 1950) says that prices of primary commodities tend to fall over time compared with prices of manufactured goods. Primary commodities are raw goods such as crops and minerals. Countries that export commodities therefore lose on their terms of trade, which means they get fewer imports for each unit of exports. The hypothesis supported the post-war case for industrialisation and import substitution in Latin America and India.
Example
Suppose a country buys a tractor by selling a fixed amount of coffee. If coffee prices keep falling compared with tractor prices, it must export more and more coffee to buy the same tractor. This helped persuade India's planners to build their own industry rather than depend on commodity exports.
Don't confuse with
- Tariff escalation: importing countries set higher tariffs on processed goods than on raw goods. This also keeps poor countries tied to commodity exports, but it comes from policy, not from long-run price trends.
Related concepts
- Absolute advantage
- Comparative advantage
- Gains from trade
- Autarky
- Heckscher-Ohlin theory
- Stolper-Samuelson theorem
- Leontief paradox
- Intra-industry trade
- New trade theory
- Gravity model of trade