Income terms of trade and economic convergence: Evidence from Latin America

The paper considers the effects of income terms of trade (ToT) on GDP per capita in Latin American economies and examines whether improvement in the income ToT (in absolute and relative terms) contributes to the stochastic convergence between respective economies and the US. It is shown that in the majority of the economies, income ToT had positive effects on the level of GDP per capita. The stochastic convergence was documented in Chile, Dominican Republic, and Uruguay. The positive effects of income ToT increase on GDP per capita convergence were documented only in Chile and Uruguay. The growth of the volume of exports played a key role in the process, while the effects on the part of net barter ToT were insignificant. In both economies, the improvement in the income ToT relative to the US level played a positive role in convergence.