Terms of trade and national saving rates in Asia

Abstract

In recent theoretical work, Obstfeld, and Svensson and Razin re-examine the Harberger-Laursen-Metzler effect of terms-of-trade changes on the balance-of-payments' current account. Their models of intertemporal utility maximization indicate that individuals' saving responses to a change in the terms of trade are ambiguous in theory. From this they infer that the corresponding movements in the current account are also ambiguous. However, they ignore the positive rate-of-growth effect incorporated in the life-cycle theory on the aggregate saving rate. This paper presents an empirical analysis of the terms-of-trade effect on aggregate national saving rates in 14 Asian developing countries over the period 1961–1981. It turns out to be significantly positive, as the life-cycle model predicts.