Terms-of-Trade, Factor Intensities and the Current Account in a Life-Cycle Model.

This paper examines the effects of terms-of-trade changes on the external adjustment of a small open economy where each consumer has a life-cycle saving function. T he supply side of the economy is given by the standard two-sector mod el with two primary factors: labor and capital. It is shown that, whe n both commodities are produced, a terms-of-trade deterioration leads to a current account deficit (surplus) if the export (import) sector is more labor intensive. Copyright 1988 by The Review of Economic Studies Limited.