Terms of trade and the current account:: a two-country/two-sector growth model

This paper examines the equilibrium relation, within the non-specialized area, between the current account and the terms-of-trade in a two-country/two-sector growth model. Along a convergent equilibrium path, this relation can have any sign depending on the trading sectors' relative factor intensities and on the steady state relative price slopes of demand for and supply of investment goods. It is also shown that a negative association between capital accumulation and the terms-of-trade for the exporter of capital intensive goods does not require an import sector growing faster than the export sector.Financial support from the Sloan Foundation and the Spanish DGICYT research project PB92-0342