The Tendency of Commodity Prices to Fall Over the Long Run
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The Prebisch-Singer hypothesis states that real commodity prices have a tendency to fall over the long run. Harvey et al. have shown that the historical evidence from four centuries of commodity price data is consistent with the hypothesis. The most convincing explanation of the phenomena is that, with important exceptions, the income elasticity of primary commodities is less than 1. This means that incomes grow faster than demand for primary commodities, so that prices must fall to clear markets. This mechanism is subject to ecological constraints since if the ecological constraint bites, prices must rise to clear markets. So far, fundamental ecological limits have not trumped the tendency of commodity prices to fall over the long run. The tendency introduces a dynamic, systematic bias in favor of the core and against the periphery of the world economy since, by construction, nations or regions specializing in primary goods belong to the latter. In what follows, I'll illustrate the tendency for a large number of commodity classes since 1850. All data is from
The Tendency of Commodity Prices to Fall Over the Long Run
The Tendency of Commodity Prices to Fall Over…
The Tendency of Commodity Prices to Fall Over the Long Run
The Prebisch-Singer hypothesis states that real commodity prices have a tendency to fall over the long run. Harvey et al. have shown that the historical evidence from four centuries of commodity price data is consistent with the hypothesis. The most convincing explanation of the phenomena is that, with important exceptions, the income elasticity of primary commodities is less than 1. This means that incomes grow faster than demand for primary commodities, so that prices must fall to clear markets. This mechanism is subject to ecological constraints since if the ecological constraint bites, prices must rise to clear markets. So far, fundamental ecological limits have not trumped the tendency of commodity prices to fall over the long run. The tendency introduces a dynamic, systematic bias in favor of the core and against the periphery of the world economy since, by construction, nations or regions specializing in primary goods belong to the latter. In what follows, I'll illustrate the tendency for a large number of commodity classes since 1850. All data is from