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The Terms of Trade, Labour Supply and the Current Account

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  • Bean, Charles R

Abstract

This paper extends Svensson and Razin's two period analysis of the Laursen-Harberger-Metzler effect to the important case where labour supply and output are variable. A terms of trade shift alters the relationship between the product and the consumption wage and so induces a change in output. This extension substantially enriches their analysis. A temporary current terms of trade deterioration has an ambiguous effect on the current account, but their finding that a future deterioration leads to an improvement in the current account is strengthened. The effect of a permanent terms of trade shift in a stationary state depends not only on the rate of time preference, but also on the strength of intertemporal substitution effects. In the canonical case of a constant rate of time preference the current account deteriorates in response to a permanent terms of trade deterioration if the degree of intertemporal substitution in consumption exceeds that in leisure, or equivalently whether the wealth effect on consumption exceeds that on labour supply. The model is then extended to an infinite horizon by embedding it in an overlapping generations framework. Intergenerational linkages through the labour market are now the source of some complex dynamics. From an initial position of balance on current account an anticipated temporary terms of trade deterioration leads to a period of steadily increasing surplus a deficit on impact, and a further period of declining surpluses. A permanent deterioration in the terms of trade leads to a similar period of anticipatory surpluses, followed by a period of declining deficits after impact.
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Suggested Citation

  • Bean, Charles R, 1986. "The Terms of Trade, Labour Supply and the Current Account," Economic Journal, Royal Economic Society, vol. 96(380a), pages 38-46, Supplemen.
  • Handle: RePEc:ecj:econjl:v:96:y:1986:i:380a:p:38-46
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    References listed on IDEAS

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    2. Guesnerie, Roger & Laffont, Jean-Jacques, 1984. "A complete solution to a class of principal-agent problems with an application to the control of a self-managed firm," Journal of Public Economics, Elsevier, vol. 25(3), pages 329-369, December.
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    4. Picard, Pierre, 1987. "On the design of incentive schemes under moral hazard and adverse selection," Journal of Public Economics, Elsevier, pages 305-331.
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    Cited by:

    1. Turnovsky, Stephen J., 1993. "The impact of terms of trade shocks on a small open economy: A stochastic analysis," Journal of International Money and Finance, Elsevier, vol. 12(3), pages 278-297, June.
    2. Nason, James M. & Rogers, John H., 2006. "The present-value model of the current account has been rejected: Round up the usual suspects," Journal of International Economics, Elsevier, vol. 68(1), pages 159-187, January.
    3. Schubert, Stefan F., 2014. "Dynamic Effects Of Oil Price Shocks And Their Impact On The Current Account," Macroeconomic Dynamics, Cambridge University Press, vol. 18(02), pages 316-337, March.
    4. Huang, Kevin X.D. & Meng, Qinglai, 2007. "The Harberger-Laursen-Metzler effect under capital market imperfections," Journal of International Money and Finance, Elsevier, vol. 26(6), pages 1001-1015, October.
    5. Tarlok Singh, 2007. "Intertemporal Optimizing Models Of Trade And Current Account Balance: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 21(1), pages 25-64, February.
    6. María Dolores Guilló, 1995. "Terms-Of-Trade And The Current Account: A Two-Country/Two-Sector Growth Model," Working Papers. Serie AD 1995-03, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    7. Eicher, Theo S. & Schubert, Stefan F. & Turnovsky, Stephen J., 2008. "Dynamic effects of terms of trade shocks: The impact on debt and growth," Journal of International Money and Finance, Elsevier, vol. 27(6), pages 876-896, October.
    8. O Okiti, 2003. "Temporary and Permanent Terms of Trade Shocks: A Literature Survey," The School of Economics Discussion Paper Series 0334, Economics, The University of Manchester.
    9. Hossain, Ferdaus, 1995. "Current account determination in the intertemporal framework: an empirical analysis," ISU General Staff Papers 1995010108000011939, Iowa State University, Department of Economics.
    10. repec:eee:reveco:v:50:y:2017:i:c:p:245-260 is not listed on IDEAS

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