Journal #J-11/2000
ncome Effects on the Trade Balance in Open Small Economies
Dragan Miljkovic(1), Rodney J. Paul(2) & Roberto J. Garcia
Department of Economics & Social Sciences Agricultural University of Norway PO Box 5033, N-1432 Ås, Norway http://www.nlh.no/ior/ e-mail: roberto.garcia@ior.nlh.no

(1) Dragan Miljkovic, Dept. of Agriculture and Ag. Business, Southwest Missouri State University
( http://ag.smsu.edu/  ) e-mail: dm417F@smsu.edu

(2) Rodney J. Paul, Dept. of Agricultural Economics and Economics, Montana State University
(http://www.montana.edu/wwwae/homepage/homepage.html  ) e-mail: uaerp@montana.edu

Miljkovic, D., R.J. Paul & R.J. Garcia (2000): "Income Effects on the Trade Balance in Open Small Economies", Applied Economics, 32(3):327-333.

Abstract:
The objective is to determine the causes of the countercyclicality of the trade balance in five small open economies, namely Austria, France, Italy, Spain, and Switzerland. In order to investigate the role of permanent and temporary changes in income in the determination of the trade balance, the Blanchard-Quah variance decomposition procedure is applied. The results of the analysis support the conclusion that transitory income shocks are major reasons for the change in the trade balance, and that negative correlation between the trade balance and income is primarily due to transitory shocks.
Thus, these results are more consistent with intertemporal models with the dichotomous view in which the aggregate demand shocks are responsible for cyclical variations in the trade balance and income and aggregated supply is responsible for the long-run growth of the economy.

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