TERMS OF TRADE, NATIONAL INCOME AND OIL PRICES: A CROSS COUNTRY ANALYSIS

National income for an open economy depends in part on the nation's international terms of trade. The exceptional increase in world oil prices and associated price shifts in related commodities have provided new dramatic illustration of terms of trade changes. The purpose of this dissertation is to estimate and evaluate national income effects of recent terms of trade shifts due to the higher oil prices. This has been done by setting the terms of trade issue in the context of a formal economic growth model which measures pertinent relationships through cross country multiple regressions. The model employed has national income as the dependent variable, and investment, the terms of trade and size of the export sector as independent variables. The reasoning behind the model presumes that economic growth reflects both domestic output changes and terms of trade changes.;Data were collected on fifty countries for national income, domestic sector investment, foreign sector investment, export revenue and total investment, as well as the terms of trade. Local currency data were converted into constant price equivalents, country by country.;Regression results show that there is a clear overall effect of terms of trade change on national income, but the change is less than proportional. Countries with positive changes in their terms of trade have enjoyed direct revaluation effects, but some have not chosen (OPEC) (and some have not been able) to realize the full benefits from this improvement. This is because of (1) holding back export growth, (2) possible distortions in their economy. In the group of countries with negative changes in their terms of trade, there is wide variation among the developing countries, while developed countries exhibit far less variation. Developing countries have achieved a higher growth rate in their national income compared to developed countries at the same rate of changes in the terms of trade.;In the group of non-OPEC developing countries, poor developing countries have negative changes in their terms of trade with a low growth rate, while advanced developing countries have a higher growth rate. Both groups have been affected by the "direct revaluation effect" due to the decline in their terms of trade, but there has not been sufficient "resource reallocation effect" to compensate for this shift.;In theory, two types of terms of trade effects should occur. Static "revaluation effects" take place as the terms of trade changes directly alter income generated from existing resources in the export sector; these income changes should be proportional to the size of the export sector. Dynamic "reallocation and employment effects" occur as the economy gradually absorbs and adjusts to the external price shock.