Trends of Relative Commodity Prices with Comovements and Structural Breaks

Abstract

The Prebisch-Singer (1950, PS) hypothesis posits a long-term decline in the relative prices of primary commodities (natural resources) compared to manufactured goods. This hypothesis carries important implications for resource management, economic growth, and the terms of trade in developing countries. It raises two critical questions that are inherently interlinked: (1) Do relative commodity prices exhibit a negative trend? and (2) Are these prices non-stationary? When addressing these questions, prior analyses have often overlooked the potential influence of cross-correlations among relative commodity prices. In this study, we jointly address these questions while explicitly accounting for cross-correlations. To achieve this, we first employ a dynamic factor model, which effectively captures the shared variations across commodity prices. Additionally, we incorporate the Fourier function to model smooth structural breaks, allowing for the identification of gradual changes in the underlying trend. The combined use of these methods yields significant insights. Our findings provide robust evidence supporting the PS hypothesis over the period 1900–2020, highlighting the persistent and systematic decline in the relative prices of primary commodities.