2.1.1 Theories of Circular Deterioration of Terms of Trade

The structure of supply and demand is such that industrialized countries offer industrial products and buy raw products and the developing industries do the reverse. According to Engel's law, the demand for raw materials tends to be inelastic while the demand for industrialized goods is elastic. The technological progress in the production of industrialized goods not only makes it possible for industrial countries to increase their incomes and thus the standard of living, but, because of the elastic demand on the world market, also to enforce higher prices. The situation in developing countries is the opposite: technological progress in primary production results in lower prices because of the inelastic demand. This mechanism leads to deteriorating exchange relations between industrialized and developing countries (and, as well, between the industrialized and the agricultural sector in developing countries). MYINTs (18) and RAO's (25) 'theory of partial pauperization' and PERROUX's (23) 'theory of dominating economy* argue along very similar lines.