The Determinants of Korea's Terms of Trade: The Real-Side Approach

Journal of East Asian Economic Integration, Vol. 15, No. 4, Winter 2011

28 Pages Posted: 30 Aug 2013

See all articles by Hongshik Lee

Hongshik Lee

Korea Institute for International Economic Policy (KIEP)

Hyuk-Hwang Kim

Korea Institute for International Economic Policy

Date Written: December 16, 2011

Abstract

Previous studies of the determinants of the terms of trade have typically failed to fully reflect the composition of imports and exports and the unique characteristics of trading partners, which have considerable influence on the terms of trade. In particular, most studies of Korea’s terms of trade have focused only on the effects of the exchange rate on the terms of trade, and few studies have considered the supply or demand side, i.e., the real side. This study considers panel data on Korea’s trading partners from 2000 to 2009 (excluding the period of the Korean’s foreign exchange crisis) to propose a model reflecting both the trading partner’s characteristics as well as the share of manufactured goods in exports and the share of fuel products in imports and provides an analysis of the determinants of Korea’s terms of trade by considering the individual features of each product. The proposed dynamic panel model of the effects of the terms of trade for the previous period on the terms of trade for the current period provides more consistent estimates. By using the system generalized method of moments, the proposed model can estimate the determinants of Korea’s terms of trade from the real-side perspective. The results indicate that an increase in the lagged terms of trade, relative market potential, or relative per capita income improved Korea’s terms of trade, whereas an increase in relative output or the share of fuel products in imports weakened the terms of trade, providing support for common theory. However, an increase in the share of manufactured goods in exports had a negative effect (although not significant) on Korea’s terms of trade, providing no support for the Prebisch-Singer hypothesis.

Keywords: Net Barter Terms of Trade, Prebisch-Singer Hypothesis, System GMM

JEL Classification: F12, F14, O12

Suggested Citation

Lee, Hongshik and Kim, Hyuk-Hwang, The Determinants of Korea's Terms of Trade: The Real-Side Approach (December 16, 2011). Journal of East Asian Economic Integration, Vol. 15, No. 4, Winter 2011, Available at SSRN: https://ssrn.com/abstract=2318229

Hongshik Lee (Contact Author)

Korea Institute for International Economic Policy (KIEP) ( email )

[30147] Building C, Sejong National Research Compl
Seoul, 370
Korea, Republic of (South Korea)

Hyuk-Hwang Kim

Korea Institute for International Economic Policy ( email )

[30147] Building C, Sejong National Research Compl
Seoul, 370
Korea, Republic of (South Korea)

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