Terms of trade and economic growth in a world of constrained capital mobility

Abstract

This paper focuses on the interaction between world commodity and capital markets within the framework of an extended neoclassical growth model. The model incorporates raw materials as an essential input and captures the observed, but hitherto unexplained impact of terms of trade on economic growth. It is shown that in a world of declining real prices of industrial raw materials, the steady state growth rate is an increasing function of the input ratio of raw materials/unskilled labour. When international capital flows are constrained, the speed of convergence is determined by the same variables.

Keywords:

• Economic growth
• capital mobility
• natural resources