An improvement in terms of trade is considered as a favourable factor and deterioration in terms of trade is considered as an unfavourable factor in the economic development of a country.
The following are the adverse effects of the tendency of declining terms of trade on the process of economic development of the less developed countries:
(i) It has the effect of a continuously weakening the capacity to import of these countries.
(ii) It has led to the weakening of the capacity of their existing primary producing industries to support their growing populations.
ADVERTISEMENTS:
(iii) It has resulted in a failure to transmit to them the benefits of technological progress from advanced countries.
(iv) It has made every individual country’s independent effort to raise the productivity of its primary producing industry result in deterioration ot their terms of trade, unemployment and balance of payment disequilibrium.
(v) It has lowered their rates of capital formation and thus their economic growth.
(vi) The primary producing countries have become handicapped in their efforts to develop their economies, and have been made dependent upon loans and grants of advanced nations.