Abstract
This paper focuses on the relationship between developing-country terms of trade and underlying economic fundamentals in the industrial economies. The focus is limited to the terms of trade of the five developing-country regions (Africa, Asia, Europe, the Middle East, and the Western Hemisphere). The analysis is based on a version of the arbitrage pricing model, which is used extensively in the literature on capital market analysis. This model links developing-country terms of trade to indicators of international macroeconomic fundamentals. In this model the terms of trade are characterized as the price of a hedge portfolio consisting of a long position in exports and a short position in imports. The primary finding is that there does not appear to be an important link between developing-country terms of trade and underlying fundamentals in the industrial countries.
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