TERMS OF TRADE AND CURRENT ACCOUNT DYNAMICS - A METHODOLOGICAL CRITIQUE

This paper suggests that the recent intertemporal studies concerning t he implications of terms-of-trade deterioration on the current account of a small open economy, may suffer from significant methodological d eficiencies. The study demonstrates that while the assumption of a sma ll open economy represents a legitimate modeling simplification, the a nalysis of the impact of perturbation of the terms of trade on the cur rent account of this small open economy is methodologically erroneous. In particular, the paper demonstrates that a given pattern of terms-o f-trade deterioration may be associated with opposing evolutionary pat terns of the current account of this small economy.