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Economic Growth, Terms of Trade and Welfare in an Open Monetary Economy

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  • TAKASHI FUKUSHIMA
  • MANOJ PANT

Abstract

The authors investigate the impact of growth on terms of trade, absolute prices and welfare using a two‐country, monetary model. Under flexible exchange rates export‐biased growth would lead to a decline in the terms of trade if the two countries are ‘similar’. Under fixed exchange rates a weaker condition than the barter condition of export‐biased growth is sufficient, namely, for the import commodity the demand creating effect of growth dominates the supply effect while for the exported commodity the opposite holds. Secondly, substitutability between money and commodities indicates that no necessary relation holds between the terms of trade and the trade balance. Thirdly, the introduction of money creates a real balance effect so that decline in terms of trade is no longer a necessary (or sufficient) condition for immiserization. Finally, the paper concludes by questioning two policy conclusions drawn in earlier models: one, that the declining terms of trade of less developed countries was due to a bias in the growth strategy and, two, that monetary models of trade support the ‘monetarist’ proposition that growth and a deteriorating trade balance can only co‐exist if the domestic monetary policy is nonneutral.

Suggested Citation

  • Takashi Fukushima & Manoj Pant, 1982. "Economic Growth, Terms of Trade and Welfare in an Open Monetary Economy," The Economic Record, The Economic Society of Australia, vol. 58(2), pages 134-140, June.
    • Handle: RePEc:bla:ecorec:v:58:y:1982:i:2:p:134-140
    DOI: 10.1111/j.1475-4932.1982.tb00359.x
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    References listed on IDEAS

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    1. Dornbusch, Rudiger, 1973. "Currency Depreciation, Hoarding, and Relative Prices," Journal of Political Economy, University of Chicago Press, vol. 81(4), pages 893-915, July-Aug..
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    3. F. H. Hahn, 1959. "The Balance of Payments in a Monetary Economy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 26(2), pages 110-125.
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