Quality Change and other Influences on Measures of Export Prices of Manufactured Goods and the Terms of Trade between Primary Products and Manufacture

Measures of long term trends in world export prices of manufactured goods and in the terms of trade between manufactured goods and primary products are sensitive to the choice of country weights and of base periods and, most important of all, the treatment of quality change. Later base periods and higher weights for rapidly growing exporters, such as Japan or the newly industrializing East Asian countries, are associated with lower estimates of the long-term increase in prices. Conservative estimates of the bias in the most commonly used measure of export prices of manufactured products, the United Nations export unit value index for manufactures, suggest that this measure overstates the long-run rise in manufactured goods prices by more than half of one per cent per year, probably one per cent or more. If this is the case, there has been no long term trend toward rising prices of manufactures relative to primary products. However, no conceivable estimate of bias in measures of manufactured goods prices would reverse the picture of declining relative primary product prices during the 1980s.