Dynamics of the Relationship Between the Terms of Trade and the Trade Balance in Developing Countries of Asia, Africa and Latin America

The objectives of this study are to examine the relationship between the terms of trade and trade balance to GDP ratios for a large number of developing economies using data on barter terms of trade, real exchange rate and trade balances. The literature on the subject postulates J-curve or S-curve between terms of trade and trade balance and we examine whether there is any evidence of a J-curve or S-curve relationship in time series data over the period 1970–1999. We find that for a few economies in Asia, Africa and Latin America, the existence of a S-curve is supported. However, for a large number of countries, neither a strict J-curve nor S-curve relationship holds. © 2004, The Indian Econometric Society.