## The Terms of Trade and Economic Fluctuations

_IMF Working Papers, November 1, 1992_

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**Canonical URL:** [The Terms of Trade and Economic Fluctuations](https://www.imf.org/en/publications/wp/issues/2016/12/30/the-terms-of-trade-and-economic-fluctuations-848)

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## Bibliographic details
- Authors: Enrique G. Mendoza
- Published: November 1, 1992
- Series: IMF Working Papers

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### Summary
- A three-good, stochastic intertemporal equilibrium model of a small open economy is used to examine the link between terms of trade and business cycles.
- Equilibrium co-movements of model economies representing industrial and developing countries are computed and compared with the stylized facts of 30 countries.
- The results show that terms-of-trade shocks account for half of observed output variability and that the model mimics the Harberger-Laursen-Metzler effect and produces large deviations from purchasing power parity.
- The elasticity of substitution between tradable and nontradable goods and the persistence of the shocks play a key role in producing these results.

### Model and Methodology
- Model type: three-good, stochastic intertemporal equilibrium model of a small open economy.
- Comparative approach: model economies representing industrial and developing countries.
- Empirical benchmark: stylized facts of 30 countries.

### Main Findings and Results
- Terms-of-trade shocks account for half of observed output variability.
- The model mimics the Harberger-Laursen-Metzler effect.
- The model produces large deviations from purchasing power parity.
- Key parameters influencing results:
  - The elasticity of substitution between tradable and nontradable goods.
  - The persistence of the shocks.

### Subjects and Keywords (as listed)
- Subject: Business cycles, Consumption, Economic growth, Import prices, International trade, National accounts, Prices, Terms of trade, Trade balance
- Keywords: Africa, Asia and Pacific, Business cycles, Consumption, form terms of trade, Import prices, Middle East, open economy, real GDP, standard deviation, Terms of trade, terms-of-trade disturbance, terms-of-trade effect, terms-of-trade shock, Trade balance, U.S. dollar, Western Hemisphere, WP

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/30/the-terms-of-trade-and-economic-fluctuations-848_