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Aggregate Spending and the Terms of Trade: Is There a Laursen-Metzler Effect?

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Maurice Obstfeld

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Abstract

This paper investigates the spending and current-account effects of permanent terms-of-trade shifts in a model where households maximize utility over an infinite planning period. In the framework we adopt, an economy specialized in production must experience a fall in aggregate spending and a current surplus when the terms of trade permanently deteriorate The model thus provides a counter-example to the argument of Laursen and Idetzler (1950) and Harberger (1950) that a permanent worsening in the terms of trade must produce a current-account deficit.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0686.

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Date of creation: Jun 1981
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Handle: RePEc:nbr:nberwo:0686

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  1. Rodriguez, Carlos Alfredo, 1976. "The Terms of Trade and the Balance of Payments in the Short Run," American Economic Review, American Economic Association, vol. 66(4), pages 710-16, September. [Downloadable!] (restricted)
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