A Model of the Terms of Trade and Economic Growth

Abstract

The single country model described in Chapter Two can easily be modified for use in analyzing international trade. Assume the parameters of demand and the production functions in each country are given.² Define M ^j_i as the net imports of good i (i = M,A) by country j, and let

$$m_{i{\kern 1pt} }^j{\mkern 1mu} = {\mkern 1mu} M_i^j/L_i^j{\mkern 1mu} for{\mkern 1mu} j{\mkern 1mu} = {\mkern 1mu} (\alpha ,{\mkern 1mu} \beta ). $$

We shall assume balanced trade so exports are simply negative imports. Also, it will be assumed there are no transportation costs.