The Balance of Payments Constraint as an Explanation of International Growth Rate Differences

Abstract

The paper shows that if long-run balance of payments equilibrium on current account is a requirement then a country's long run growth rate can be approximated by the ratio of the growth of exports to the income elasticity of demand for imports. The model fits well the experience of eighteen OECD countries. It is output, not relative prices, that adjusts the balance of payments, contrary to the neoclassical orthodoxy. Growth can be demand constrained by the balance of payments.

Keywords: balance of payments, growth, dynamic Harrod trade multiplier

JEL Classification: F32, F43