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

María Guilló

Spanish Economic Review, 2001, vol. 3, issue 1, 71-80

Abstract: 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.

Keywords: Terms of trade; trade balance; two-sector OLG (search for similar items in EconPapers)
JEL-codes: F11 F32 F40 (search for similar items in EconPapers)
Date: 2001-04-18
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Citations: View citations in EconPapers (7)

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