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Historically the terms of trade of the developing countries have been unfavourable due to the fact that when income in developed countries rises, the demand for
Historically the terms of trade of the developing countries have been unfavourable due to the fact that when income in developed countries rises, the demand for primary goods declines because
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The income elasticity of demand for a good is defined as the percentage change in the quantity demanded of the good divided by the percentage change in income. Primary goods are goods of necessity and hence income elasticity is less than 1. The implication is that a 10 percent rise in income leads to a less than 10 percent increase in demand for primary goods. Hence, the developing countries experience historically unfavorable terms of trade.