Terms of Trade and Balance of Trade: Some Evidence for the Argentine Economy

The terms of trade faced by commodity producing countries have improved markedly in recent years, generating significant changes in their economies. This paper examines the effect of these shocks on Argentina’s domestic product and trade balance. In particular, this paper attempts to verify the existence of the Harberger- Laursen-Metzler (HLM) effect: an increase (decrease) in the terms of trade would lead to an improvement (deterioration) in the trade balance. To this end we use a structural VAR approach, which allows us to estimate the effects of unanticipated terms of trade shocks on the domestic product and trade balance in the long run. We find preliminary evidence that supports the existence of the HLM effect. Further, positive terms of trade shocks have a positive and permanent effect on real GDP.