Document Type

Article

Publication Date

Fall 2014

Keywords

Balance of trade, aggregate demand, aggregate supply, price level elasticity

Abstract

This paper investigates the role of aggregate demand elasticity for the balance of trade when economic expansion occurs. Our conclusions are two. First, when an economic expansion results from an increase of aggregate demand, the balance of trade deficit is larger the less elastic is aggregate demand with respect to the general price level. Second, when an economic expansion happens from an increase of short-run aggregate supply, the price level elasticity of aggregate demand determines both the direction of change of the balance of trade and the size of the resulting deficit or surplus. We show here that a relatively elastic aggregate demand can result in a balance of trade deficit while a relatively inelastic aggregate demand can yield a balance of trade surplus.

Comments

Copyright 2014 American Economist.

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