What Can Acount for Fluctuations in the Terms of Trade?

Fluctuations in the terms of trade-the price of a country's exports relative to the price of its imports-are a source of perennial to policymakers in developing countries and industrialized nations alike. Terms of trade growth is extremely volatile and can lead to sudden changes in a country's economic health. This paper seeks to understand the sources of fluctuations in the terms of trade. We decompose a country's terms of trade volatility into a component stemming from differences in the composition of import baskets and export baskets, which we define as a "goods price effect," and a component due to cross-country diffe rences in the price of a particular class of goods, which we call a "country price effect."