Question

Suppose the island of Atlantis imports only one product, machinery parts, at a per unit price of $125. At the same time, its only export good is palm oil, which sells at $250 per unit on world markets. Atlantis currently exports 100 units of palm oil.
Suppose that over time the import price of machinery parts rises to $150 while the world palm oil price decreases to $200.

Are these price changes in line with the Prebisch-Singer hypothesis? Why or why not

Answer 1

Ans

Yes these price changes in line with the Prebisch-Singer hypothesis, Because -

1) As according to Prebisch-Singer hypothesis says that country with high export dependent on primary products like here it is Palm Oil may loose when the trade terms get worsen.

2) Because of the fall in demand at global level and fall in prices at global level for primary products willl lead to increase in trade deficit for that country which is exporting primary commodity particularly.

3) Demand of commodities like food increase at less pace compared to demand of luxury items which increase at sharp pace.

4) As productivity increases at faster pace in the industrialized countries than in the primary-producing countries. And people demand of luxurious commodities increases when standard of living rises due to which industrailised countries exporting technology are at edge than countries which import technology and export primary commodity.

Here, in this Case - Atlantis imports only one product, machinery parts, at a per unit price of $125 and exports palm oil, which sells at $250 per unit on world markets. So here, when the price of technology increases (which they import) and price of primary commodity (which they export) decreases it lead to negative effects on the country which is exports depenedent on primary commodities. As when import of machinery increases to $150 Atlantis will find it difficult to import it as it is costly now and as as their Palm oil prices went down to $200 they will have trade deficit as now through export they will not be able to generate that much revenue which they generated earlier and not be able to import as money supply will decrease in their economy.