DP248 North-South Growth and the Terms of Trade

Author(s): Hassan Molana, David Vines
Publication Date: June 1988
Keyword(s): Equilibrium Growth, Exchange Rates, Kaldor, World Economy
JEL(s): 111, 411, 711
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=248

This paper examines equilibrium growth and stability in the world economy using a North-South model in which there is assumed to be surplus labor in both North and South at an exogenously determined level of real wages. The model allows for substitution in consumption between primary commodities and industrial goods in the North. It treats the cases of both surplus and scarce land in the South. In the case of an exogenous shock to the model, the North-South terms of trade may overshoot its equilibrium value and/or converge to this value along a cyclical path: there is no guarantee that the adjustment path is stable.