Fallacious argument for TT deterioration:

LDCs they result  in  lower prices as primary goods  markets  are  perfectly competitive.  So as productivity increases constantly, the net barter terms of trade (NBTT)  of primary products would deteriorate constantly. But this conclusion does not follow  so  simply  or as stated. The NBTT  is a ratio of two money prices. Fixing one will  cause the other to adjust to  it at  the market clearing relative price. It,  therefore, doesn't follow  that  fixing one price  necessarily implies a deterioration  in the terms of  trade.

To see this, we develop  a  simple model. We assume  two  regions each specialised in production of one good. There is constant employment in each region and labour immobility between  nations, and  costless  technical progress.  We assume equal produlctivity growth  in both regions, and unit income elasticity of demand for both products. We also assume wages are  proportional  to value added per worker so  that the share  of wages in national  income  is  constant. We also assume macroeconomic equilibrium.

Suppose there  is  constant  productivity  growth  in  both primary commodities, C, and manufactures,  M.  Suppose NBTT  (  P  =  P_c/P_m)^X  is at the market  clearing value.  Now  because  of  technical change,  the output of both  C  and M  will increase by the same proportion and, therefore,  so  will world  income. Since  income  elasticities  of  demand are all unity, demand for C and M will  also  increase  by  the same proportion and  the  market for both will just clear at the previous relative  price.  The unchanged relative price is  sustainable  and  there  is  obviously  no  deterioration of the NBTT.  

Suppose response  is asymmetrical along Prebisch-Singer lines. In  the North, money wages rise  in pmpo~onto  productivity  in

manufactures  so  thqt Pm does  not  change. But PC  falls by  the same percentage as  increase in  productivity.  The NBTT  have  deteriorated. But the market will not clear. There is excess  supply  of manufactures  and excess  demand for commodities  as  price of commodities has fallen and that  of manufactures risen  relatively. One solution is for manufacturing output and employment to  fa.  In  this case, fall  in NBTT will persist. But  this  is not proposed as a serious scenario. Another is for the increase  in productivity to raise output of primary commodities, a case we examine later. The only other plausible market  clearing mechanism is for PC  to rise as Pm  cannot change, and it will keep onlrising  till the earlier NBTT  is  restored.

The original NBTT depended on a particular degree of monopoly power in manufacturing.  As long as the degree of-monopoly power does not change, there will be no effect on NBTT. And there is no plausible reason to assume a continuously increasing monopoly power in manufactures.