UNU-MERIT Working Papers Series

Uneven development and the balance of payments constrained model: Terms of trade, economic cycles, and productivity catching-up

Danilo Spinola #2020-003

This paper expands the Dutt (2002) version of the Balance of Payments Constrained Model (BPCM). We question the assumption of price-neutrality and the incompatibility between the BPCM and the Prebisch-Singer hypothesis (PSH) in terms of the long-run terms-of-trade dynamics. The research focuses on three main elements: (1) the long-run behaviour of the terms of trade in a Structuralist framework. (2) The cyclical endogenous dynamics in the relationship between economic activity and income distribution à la Goodwin. (3) Productivity gap and catching-up. This article adds to the Dutt(2002) model (a) a productivity gap dynamics in which the south has a catching-up element; (b) labour market by including a Phillips Curve for the relationship between employment rate and economic activity; (c) labour supply dynamics that considers the labour transfer issue between traditional and modern sectors. We find that the Structuralist/evolutionary arguments hold in the BPCM framework with these changes.

Keywords: Balance of Payments constrains, Terms of Trade, Economic Cycles, Latin American Structuralism

JEL Classification: E22, E32, O41

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