Exchange rate changes and endogenous terms of trade effects in a small open economy

This paper shows that the small-country assumption of dependent-economy models is unlikely to hold for many of the cases in which this class of models is used, for example, in the analysis of a terms of trade shock in the “commodity currency” models. When a shock affects most or all of the small countries exporting a commodity, the combined exchange rate effects will result in endogenous terms of trade changes even for those countries too small to individually affect world markets. The paper also explores the possible implications of these secondary terms of trade changes for the dependent-economy models.     

Paradoxical trade patterns and terms of trade

It is shown that, when a monopoly is present in a two-country, two-commodity world, the terms-of-trade do not necessarily fall in between the pre-trade relative prices of the two countries, and that these pre-trade prices do not unequivocally determine the pattern of trade.     

Rising trade costs? Agglomeration and trade with endogenous transaction costs

Abstract.  While transport costs have fallen, the empirical evidence also points at rising total trade costs. In a model of industry location with endogenous transaction costs that seeks to replicate features from the machinery industry, we show how and under which conditions a decline in transport costs can lead to an increase in the total cost of trade. The subtle relationship between (endogenous) transport costs and the sensitivity of trade to distance is also explored.     

Macroeconomic effects of terms of trade fluctuations in commodity exporting advanced economies

The paper examines the impact of world commodity prices on national output and trade balances in Australia, Canada, New Zealand, and Norway, OECD economies that, unlike other advanced economies, are heavily dependent on commodity exports. Contrary to Dutch disease theory based on real exchange rate adjustment, it highlights the relative price effects of terms of trade (ToT) changes on gross domestic product and net exports with reference to the experience of this unique set of OECD countries. The econometric analysis verifies key predictions of this alternative perspective that ToT fluctuations should (i) have no significant short-run impact on GDP and that (ii) due to relative price effects a strong positive relationship between the ToT and net exports is unlikely.     

Trade taxes and the current account

We show that, under some conditions, a temporary import tariff improves the current account, whereas a temporary export tax deteriorates it. Permanent import tariffs and export taxes have an identical, although ambiguous, effect on the current account.     

Taxation,inflation, and the terms of trade

The interaction between changes in the rate of inflation and tax systems can have potential terms of trade effects. An open-economy macroeconomic model is presented in which such effects are analyzed. The asset menu consists of money, corporate capital whose nominal income is subject to taxation, and consumer durables whose return is tax exempt. This may be contrasted with the conventional menu of money and capital and/or bonds. Durables are imported. An increase in the rate of inflation then implies that the terms of trade of the country in question deteriorates in the long run.     

Foreign ownership, non-traded goods and the effects of terms of trade changes on national welfare

This paper extends the theory of international trade in the presence of foreign ownership to incorporate non-traded goods. It is shown that, with non-traded goods, national and aggregate welfare might move in opposite directions in response to a terms of trade deterioration even when national and aggregate trade specialization patterns coincide.     

The trade balance and the terms of trade in a two-country two-sector OLG economy

We consider a two-country, two-sector OLG model. It is shown that the trade balance and the relative price of exports are always positively related when exports are labor intensive regardless of the elasticity of intertemporal substitution in consumption. A large response of savings to future prices becomes a sufficient condition for an inverse relation between these variables only if exports are capital intensive. In this case, a rise in the terms of trade can be followed by a trade balance decline if consumption goods are capital intensive and the income effect implied on savings is negative and large.     

Balance-of-payment-constrained growth in unbalanced productive structures: disregarded terms of trade negative effects

Abstract:

The aim of this paper is to analyze the relation between foreign asset formation (FAF) and terms of trade (TOT) in countries characterized by unbalanced productive structures (UPS). This is done by modifying the structuralist thesis about the (overstated) positive effects of a rise in TOT on the balance-of-payment equilibrium gross domestic product growth rate. The theoretical analysis follows Thirlwall’s law and its subsequent modifications. The paper’s main contribution will be to explain and formalize the low—and even null—effects of TOT on balance-of-payment constraints due to the quasi-rent generated in the export sector of a UPS. To reinforce this idea, the empirical section econometrically shows the existence of a significant and positive relationship between TOT and FAF in developing countries.     

International macroeconomic fluctuations and the current account

Abstract.  Intertemporal models of the current account generally assume that global shocks do not affect the current account. We use this assumption to identify global and country‐specific shocks in a bivariate VAR of output and the current account. Cross‐country evidence from the G7 economies suggests that this identification works surprisingly well. We then employ our method to collect stylized facts on international macroeconomic fluctuations. We find that long‐term output growth is driven mainly by global factors in most G7 countries and that country‐specific shocks are less persistent and generally less volatile than global shocks. JEL Classification: F41, F43, C32
Fluctuations macroéconomiques internationales et compte courant.  Les modèles inter‐temporels du compte courant postulent généralement que les chocs globaux n'affectent pas le compte courant. On utilise ce postulat pour identifier les chocs globaux et ceux qui sont spécifiques à des pays donnés dans un modèle VAR du produit global et du compte courant. Les résultats transversaux pour les pays du G7 suggèrent que cette forme d'identification donne de très bons résultats. On emploie cette méthode pour examiner des faits stylisés des fluctuations macro‐économiques internationales.Il appert que la croissance à long terme du produit dépend de facteurs globaux dans la plupart des pays du G7 et que les chocs particuliers aux pays ont un impact moins permanent et moins volatile que les chocs globaux.     

Recession,terms of trade,and immigrants

The current literature does not adequately analyze how economic crisis affects employment of immigrants in host countries. It is generally believed that immigrants lose jobs and return home during recession. We show that recession may instead help relatively unskilled immigrants when it leads to terms-of-trade improvement in the host country, and when the unskilled sector is protected by minimum wage regulations. We also derive the condition under which the income gap between natives and immigrants falls.     

Transfers, the terms of trade, and capital accumulation

Abstract .  In the context of a two-sector overlapping-generations model it is demonstrated that a steady-state transfer paradox may arise under commodity trade with stability and without distortions or bystanders. The existence of the paradox is due to the effect of the transfer on world capital accumulation, which is shown to always (i.e., for any ranking of factor intensities and savings rates) improve the donor's terms of trade. Transfers may also improve steady-state welfare for both donor and recipient and produce paradoxical welfare results along the transition path.     

The cost of adjustment: On comovement between the trade balance and the terms of trade

The S-shaped cross-correlation function between the trade balance and the terms of trade has been documented for several countries and time frames. The ability of two-country, two-good business cycle models to reproduce this regularity hinges on the dynamics of capital formation. We consider the consequences of modeling the adjustment costs for comovement in the trade balance and the terms of trade. Both complete and incomplete market models with capital adjustment costs à la Hayashi (1982) deliver the S-curve seen in the data while the model with investment adjustment costs à la Christiano et al. (2005) does not.     

Carbon pricing and terms of trade effects for China and India: A general equilibrium analysis

Using country-specific dynamic computable general equilibrium (CGE) models, this paper estimates carbon prices in China and India, and compares the effects of carbon pricing policies under terms of trade effects. Estimated carbon prices are higher in China due to differences in emission intensity and in the rate of deployment of new technologies in the models. Differences in carbon prices open up the possibility of carbon trading between the two countries to achieve mitigation objectives. Further, under assumptions about different exchange rate regimes and international fossil fuel prices, the effects of carbon pricing policies on the two economies are mostly similar in terms of direction but, expectedly, different in terms of magnitude. Terms of trade effects could exacerbate carbon pricing effects to a greater degree in China as the country is significantly more dependent than India on external trade and investment. Policymakers should factor in terms of trade effects while designing or evaluating carbon pricing policies in the two countries.     

The pollution terms of trade and its five components

Based on two extensions, this paper proposes a re-appraisal of the concept of the pollution terms of trade (PTT) introduced by Antweiler (1996). First, detailed data allows capturing the effect of differences in emission intensities across countries and over time. Second, relying on Johnson and Noguera (2012), the revised PTT index controls for trade in intermediate goods and is based on value-added rather than gross output figures. Applied to a database for SO₂ emission intensities for 62 developed and developing countries over the 1990–2000 period, it turns out that the first extension has a larger empirical importance than the second one. The global pattern is one in which the major rich economies exhibit a PTT index below one (higher pollution intensity in imports than in exports). Trade imbalances tend to exacerbate this asymmetry, allowing rich economies to further offshore their pollution through trade.     

利用外国直接投资与贸易条件分析

通过大量数据说明。中国FDI主要流向劳动力密集型出口部门。这种流向特征一方面导致中国出口消费品的超额供给,另一方面又带动了对资本、技术等密集型产品的进口FDI需求的增长,使中国的贸易条件趋向恶化。要改善中国的贸易条件,应当进一步加强对外资流向的引导,从根本上增加外资流向资本技术密集型部门和服务业的比重,降低流向一般制造业的比重。     

Wealth effects and agency costs

We analyze how the agent's initial wealth affects the principal's expected profits in the standard principal–agent model with moral hazard.We show that if the principal prefers a poorer agent for all specifications of action sets, probability distributions, and disutility of effort, then the agent's utility of income must exhibit a coefficient of absolute prudence less than three times the coefficient of absolute risk aversion for all levels of income, thus strengthening the sufficiency result of Thiele and Wambach (1999). Also, we prove that there is no condition on the agent's utility of income alone that will make the principal prefer richer agents. Moreover, we show that, for an interesting class of problems, the principal prefers a relatively poorer agent if agent's wealth is sufficiently large. Finally, we discuss how alternative ways of modeling the agent's outside option affects the principal's preferences for agent's wealth.     

Export sophistication and the terms of trade of the developing and emerging countries

The question of the terms of trade has not yet been studied by the new empirical literature on the export sophistication, which focuses only on its effect on economic growth. The contribution of this paper is to investigate whether the increase in the export sophistication is terms of trade worsening or improving for the developing and emerging economies. Importantly, we find that the increase in the sophistication of the developing countries’ exports is accompanied by a deterioration of their terms of trade.     

Consumption-smoothing and the excessiveness of Greece's current account deficits

This paper investigates whether the sequence of current account deficits experienced in Greece over the 1950–1995 period have been excessive. The degree of excessiveness is gauged by comparing the actual current account series to an optimal current account measure derived from an intertemporal model of current account determination. The findings indicate that optimal consumption smoothing did not take place over the sample period suggesting that the existing restrictions to the free flow of capital were binding. More importantly the stock of net foreign liabilities was found to have been set on an unsustainable path following the 1989/90 balance of payments crisis yet there is clear evidence that this tendency has been gradually reversed during the last couple of years. First version received: October 1996/Final version received: November 1997     

Growth and the current account: Malaysia and Singapore

A foreign trade model is estimated for two South East Asian countries, selected because they represent two extremes as far as the current account balance is concerned—Malaysia, deficit, Singapore, surplus. The specification highlights, (a) the simultaneous interdependence of exports and import flows—a result of what Krugman [1995] denotes as the slicing up of the production process—and, (b) the impact of investment on imports as a result of productivity shocks on the current account. The estimation results point to the instability of the market for foreign exchange. Using an intertemporal framework, a methodology to derive the external long run equilibrium is applied to the estimated model. The implied constraint on domestic growth turns out to be mild. This research has been financed by the Dgicyt under grant PB94-1502, and the Junta de C. y L. under grant SA 35/97. The comments and suggestions of the editor of the journal and an anonymous referee are gratefully acknowledged. The paper has also benefited from the comments of the participants at the Fifty-First International Atlantic Economic Conference, March 13–20, 2001, Athens, Greece, and at the AEA conference on New Financial Instruments and Emerging Markets, Paris, 1998. Any possible remaining errors are the authors.