Thoughts on balance-of-payments constrained growth after 40 years

Abstract

This paper considers how Thirlwall’s balance-of-payments-constrained growth model has fared over the preceding 40 years. Issues dealt with include how the model fits into Harrod’s closed-economy dynamic model; whether the model is a tautology; the role of the exchange rate and terms of trade in influencing the long-run growth rate, and whether capital inflows make any difference to the long-run predictions of the model. The conclusion is that it is mainly the structure of production and trade that determines the long-run growth rate of countries, within a balance-of-payments equilibrium framework, as determinants of the income elasticities of demand for exports and imports.