Abstract
A two‐sector model of terms of trade (TOT) determination is developed and tested using time‐series data for Turkey. Empirical results support the structuralist ‘flex‐price agriculture fix‐price industry’ models. TOT is found to be sensitive to changes in nominal demand and the exchange rate. Rising nominal demand turns the TOT in favour of the agricultural sector provided that there are no supply constraints in the industrial sector. If industrial supply is constrained by import bottlenecks, then aggregate demand expansion turns the TOT in favour of the industrial sector. Devaluation turns the TOT against the agricultural sector primarily via the cost‐push factors in the industrial sector.
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