Table of Contents

  • The volatility of the floating exchange rate system in operation for currencies during the last decade or so has had profound effects on the world economy. The precise nature of many of these effects remains controversial but it is clear that exchange rate fluctuations and misalignments have had a particularly marked impact on the livelihoods of hose who produce for or sell on international commodity markets. Though the amount of literature on the effects of exchange rates on international trade has increased greatly during recent years, comparatively little of it has been directed towards the concerns of developing countries or the marketing of the primary commodities on which many of them still depend for their economic survival.

  • In the past, commodity prices have shown a tendency to move in response to the trade cycle in industrial countries. Supply shocks arc of importance to individual commodities, but they can be expected to occur randomly, so that they tend to cancel each other out in any index of commodity prices as a whole. If we consider such an index, and leave to one side the issue of long-term trends in the terms of trade, the fluctuations around the trend can reasonably be expected to have much to do with changes in demand in the industrial countries.

  • Futures markets organized by commodity Exchanges - often called Terminal Markets in London, the terms being synonymous - exist, in essence, because of the volatile nature of primary commodity prices. Commodity prices have always exhibited this instability. For example. The Economist index for all non-fuel commodities, which is available continuously since 186O, shows that the largest annual decline in commodity prices - no less than 33 per cent - occurred from 192O to 1921 4D per cent from 1920 to 1922).