homogeneity restriction holds, i.e., �� �1, equation (5) would be equivalent to (4). Last, it should be noted that the primary purpose of this paper is to examine the ToT‐income relationship and the channel through which the latter affects the former. We do not attempt to model the supply‐side factors on commodity prices, which are likely to play an important role due to the nature of agricultural production. However, we do account for the impact of supply‐side factors by including the stocks‐to‐use ratio of each commodity in equations (4) and (5).

# **4. Data**

We consider six agricultural commodities, maize, soybeans, wheat, rice, palm oil, and cotton. The inclusion of cotton was motivated by the desire to account for as much of world’s arable land as possible. Commodity prices represent annual (calendar) averages, expressed in U.S. dollar per metric ton for crops and in US dollars per barrel for crude oil, all of which are obtained from the World Bank’s Commodity Price Database.

We use the manufacture unit value (MUV) as a proxy for manufacturing prices. The MUV is a US dollar trade‐weighted index of manufactures exported from 15 economies (Brazil, Canada, China, Germany, France, India, Italy, Japan, Mexico, the Republic of Korea, South Africa, Spain, Thailand, the United Kingdom, and the United States). The MUV has been used extensively in the literature as a deflator of nominal commodity prices when calculating real prices, or ToT (almost all studies reported in Appendix A that have used the Grilli‐Young data have utilized MUV).<sup>**2**</sup> Given the study’s objective to identify the effect of income on food prices, 16 alternative income measures were used, by measuring GDP at market prices and Purchasing Power Parity (PPP) terms for four aggregation levels following the World Bank’s classification (world, high‐, middle‐, and low‐income countries), both in global and per capita terms (figure 4). For the real interest rate, the 3‐month U.S. Treasury bill, adjusted by the U.S. Consumer Price Index was used. The exchange rate was represented by the U.S. dollar Real Effective Exchange Rate against a broad basket of currencies. The stocks‐to‐use ratio represents the ratio of global ending stocks to global consumption at the end of the marketing year, obtained from the U.S. Department of Agriculture’s

> **2** The description of commodity prices is as follows (country names in parentheses indicate where the trans‐ action takes place; they do not correspond to the average prices received by producers or paid by consum‐ ers): **maize** (United States), no. 2, yellow, f.o.b. (free on board) U.S. Gulf ports; **rice** (Thailand), 5 percent broken, white rice, milled, indicative price based on weekly surveys of export transactions, government standard, f.o.b. Bangkok; **wheat** (United States), no. 1, hard red winter, ordinary protein, export price de‐ livered at the U.S. Gulf port for prompt or 30 days shipment; soybeans (United States), c.i.f. (cost, insurance, freight) Rotterdam; **palm oil** (Malaysia), 5 percent bulk, c.i.f. N. W. Europe; **cotton** (Cotton Outlook ʺCot‐ look A indexʺ), middling 1‐3/32 inch, traded in Far East, C/F beginning 2006; previously Northern Europe, c.i.f.; and crude oil, average price of Brent, Dubai and West Texas Intermediate, equally weighed. Infor‐ mation of price data and MUV can be found at http://worldbank.org /commodities

_7_