ABSTRACT
Thirlwall (1979, 1982) has formally shown a close association between the growth of output and the dynamic Harrod foreign trade multiplier using data for a number of developed countries. As he puts it:
In the long run, no country can grow faster than at that rate consistent with balance of payments equilibrium on current account, and if the real terms of trade do not change much, this rate is determined by the rate of growth of export volume divided by the income elasticity of demand for imports. Attempts to grow faster than this rate mean that exports cannot pay for imports, and the economy comes up against a balance of payments constraint on demand, which affects the industrial sector’s ability to grow as fast as labor productivity.
