ABSTRACT
Interest in the impact of economic expansion on terms of trade dates back to Edgeworth, who conjectured that the expanding country might be worse off after expansion than before. The factor price differential is assumed to exist in the labour market while the market for capital is assumed to be non-distorted. This chapter analyses the consequences of economic expansion. Economic expansion was subdivided into two sources: technical progress; and factor accumulation. It has been shown that the traditional view that export-biased growth generally results in deterioration in the terms of trade of the growing country need not hold in the presence of a factor price differential. This result casts doubt on the theoretical underpinnings of the two hypotheses the dollar problem and the secular deterioration of the terms of trade of less-developed countries. In contrast with the perfectly competitive model a deterioration in the terms of trade may reduce immiserisation.
