External Terms of Trade and Structural Sustainability in Services Sector: Evidence from Peru

This study examines the long-run relationship between the external terms of trade (TOTs) and real GDP of the services sector in a small open economy, focusing on the Peruvian economy. Although the services sector concentrates the largest share of employment and urban income, its exposure to persistent external price cycles remains relatively understudied in sector-specific empirical research. Building on the notion that TOTs operate as an external anchor shaping macroeconomic conditions beyond export activities, this paper evaluates whether sustained external shocks are structurally linked to services-sector performance. The analysis employs a Johansen cointegration framework and a bivariate Vector Error Correction Model (VECM) using quarterly data for the period 1996–2024. This approach allows for distinguishing long-run equilibrium relationships from short-run adjustments without imposing strong causal assumptions. The results indicate the presence of a stable long-run relationship between the TOTs and services-sector GDP, with adjustment dynamics consistent with a gradual absorption of external shocks. From a sustainability perspective, the findings suggest that the expansion of the services sector is not independent from external trade conditions, highlighting the relevance of structural resilience under recurrent international price volatility. This study contributes to the literature by providing sector-level empirical evidence for a resource-dependent economy and offers a replicable analytical framework for examining structural sustainability in other small open economies with similar productive characteristics.