Intermediate Imports, the Terms of Trade, and the Dynamics of the Exchange Rate and Current Account

21 Pages Posted: 31 May 2004 Last revised: 25 Jun 2010

See all articles by Maurice Obstfeld

Maurice Obstfeld

University of California, Berkeley - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Date Written: September 1980

Abstract

This paper studies the macroeconomic effects of an increase in the price of an imported intermediate production input. The framework of the analysis is a small open economy with abating exchange rate and endogenous terms if trade, in which saving depends on residents'(variable) rate of time preference. Contrary to popular conceptions, an intermediate price shock may lead to an appreciation of the exchange rate in both the short run and the long run, and is likely to occasion a current-account surplus. The terms of trade between foreign and domestic finished goods always improve in the long run.

Suggested Citation

Obstfeld, Maurice, Intermediate Imports, the Terms of Trade, and the Dynamics of the Exchange Rate and Current Account (September 1980). NBER Working Paper No. w0540. Available at SSRN: https://ssrn.com/abstract=264376

Maurice Obstfeld (Contact Author)

University of California, Berkeley - Department of Economics ( email )

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HOME PAGE: http://emlab.berkeley.edu/users/obstfeld/

Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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