The terms of trade and the direction of trade in the Maltese economy

Abstract

This paper attempts to show that changes in the Maltese terms of trade are influenced by Malta's direction of trade, and not by the agricultural/manufacturing composition of exports and imports. It is shown that the deterioration (or improvement) of Malta's commodity terms of trade may be linked to the fact that Malta has to compete with developing countries in its export trade and to purchase most of its imports from industrialized countries. The paper also describes Malta's incomes terms of trade and shows that these have tended to change in a different manner from the commodity terms of trade. It will be suggested that the improvement in Maltese export competitiveness may in some years, have given rise to an increase in export demand which more than offset the negative effect of a fall in the relative prices of exports. The conclusions reached in this paper may have implications for very small and very open economies, where knowledge of what determines the terms of trade is of extreme importance, due to the fact that changes in the ratio of export to import prices have a relatively very high impact on the capacity to import of such countries.