Abstract
This paper examines the impact of the terms of trade on the trade balance in 16 countries over the present flexible rate period, 1973:2 through 1992:4. The cointegration tests employed are those suggested by Stock and Watson (1993),'Johansen and Juselius (1990) and Engle and Granger (1987). The results indicate that, for a majority of the countries, there exists a positive and significant long-run “statistical equilibrium” between the trade balance and the terms of trade. The approach adopted in this study is found to be an acceptable substitute for testing the Marshall-Lerner condition of stability.
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