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Does Any Long-Run Relation Exist Between the Terms of Trade and the Trade Balance?

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Abstract

In this paper we use the Johansen and Juselius cointegration technique t examine the long-run convergenCe between the trade balance and the terms o trade, using quarterly data from Sweden. The results show that the trade balance and the terms of trade are cointegrated in the long run and the trade balance is positively correlated with the terms of trade. This implies that productivity gap between the domestic economy and the rest of the world, implying technological shock to the domestic economy, affects the trade balance. The policy implication of our findings is that the use of the origina1 Marsha Lerner condition is no longer sufficient as a justification for currency depreciation and the condition may be excessively conservative when the pricing to market phenomenon is important in explaining the evolution of the external trade balance.

Suggested Citation

  • Hatemi-J, Abdulnasser & Irandoust, Manucherhr, 2001. "Does Any Long-Run Relation Exist Between the Terms of Trade and the Trade Balance?," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 54(2), pages 177-185.
  • Handle: RePEc:ris:ecoint:0216
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    More about this item

    Keywords

    Terms of trade; trade balance; cointegration Johansen’s VAR;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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