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Nontraded Goods and the Current Account
Author(s) -
Driskill Robert
Publication year - 2001
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/1467-9396.00259
Subject(s) - economics , current account , econometrics , elasticity (physics) , monetary economics , terms of trade , balance of trade , macroeconomics , exchange rate , thermodynamics , physics
This paper investigates trade balance and current account behavior in response to various shocks when the economy produces and consumes both traded and nontraded goods. Previous analyses of these problems have interpreted current account behavior in terms of tension between parameters that measure intratemporal and intertemporal elasticity, respectively. This paper provides a simple general criterion for whether trade and current account behavior is “perverse” vis‐à‐vis the standard one‐good model results: behavior is perverse if and only if traded and nontraded goods are Edgeworth complements; that is, if the cross‐partial of the instantaneous utility function is positive.