The Terms of Trade for Commodity Exports: A Case Study of Kenya

The study estimated changes in the terms of trade of three Kenyan exports--tea, coffee, and pyrethrum--to test the validity of the theory of deterioration in the terms of trade for primary products. Several different measures of the terms of trade were considered. The results show no evidence of a secular deterioration. They also indicate that the terms of trade measure is extremely sensitive to the choice of the price index for manufactured goods. To evaluate the impact of domestic policies, costs and returns of the three exports were examined. The results show that the impact of policy distortions on profits is far greater than the impact of expected future world price declines. Future export expansion still is possible because policy changes can offset the effect of low world prices.

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