Terms-of-trade dynamics in Asia: An analysis of national saving and domestic investment responses to terms-of-trade changes in 14 Asian LDCs

Abstract

I estimate a three-equation model of savings, investment and growth on pooled time-series data for 14 Asian developing countries to explore terms-of-trade dynamic effects on the current account. A terms-of-trade deterioration lowers aggregate saving and raises investment in the current year. It also exerts a positive lagged effect on investment due to the unanticipated, temporary nature of the terms-of-trade change. The current account oscillates before returning gradually to its steady-state level. The model explains 65 per cent of the variance in the sample countries' current accounts over the period 1962–1983.