Terms of Trade and Economic Cycles: 1950–1998

This article examines the relationship between terms of trade and economic growth in Peru during the period 1950–1998, addressing the relevance of this study in the context of a small, open economy that is highly dependent on commodity prices. The research proposes constructing terms-of-trade and output series that correct for limitations in existing series, such as the use of fixed base years. Using the Fisher formula and chaining methodology, it is estimated that a 10-percentage-point increase in the terms of trade is associated with an increase of between 1.1 and 1.5 percentage points in gross domestic product (GDP). The results reveal that since 1974, the Peruvian economy has exhibited greater volatility, with a downward trend in terms of trade, and it is established that the decline in terms of trade has coincided with periods of economic recession. The policy implications suggest that greater export diversification and the implementation of financial mechanisms could mitigate the negative effects of terms-of-trade shocks. (Abstract and audio: Department of Economic Publications)