Trends in terms of trade and economic welfare: A case study of Sudan and Germany, 1970-1990

The research question of this study is the following: does the standard of living in developing countries decline due to their trade with industrial countries? In the study of this question, static and dynamic versions of a model developed by Graciela Chichilnisky are specified and estimated. These models are used to test hypotheses related to Sudan by simulating an upward shift in demand for machinery in Germany. This simulation is meant to represent the typical process of an upward shift in demand for Northern industrial goods which in turn stimulates a greater demand for Southern primary goods. The following are the hypotheses tested empirically on the trade relations between Sudan and Germany for the period 1970 through 1990. (i) Would an upward shift in demand for machinery in Germany lead to declining terms of trade for Sudan? (ii) Would an upward shift in demand for machinery in Germany lead to lower real wages in Sudan? (iii) Would an upward shift in demand for machinery in Germany lead to a lower consumption level in Sudan? (iv) Would an upward shift in demand for machinery in Germany lead to a decline in export earnings in Sudan?; The model is a two-country, two-good, two-factor general equilibrium model and is applied to Sudan and Germany. The two goods are cotton and machinery. Sudan exports cotton and imports machinery, whereas Germany exports machinery and imports cotton. The two countries, Germany and Sudan, may be viewed as representative examples of North and South, respectively.; The empirical findings obtained through the static and the dynamic models are similar in terms of the main aspect of the trade relations between Sudan and Germany. Terms of trade and total export earnings declined by both accounts, supporting the main hypotheses. But the study provided conflicting results regarding the trends in real wages and the level of consumption.