Foreign Demand, Investment And Trade Balance: The Case Of Australia

Abstract

This paper aims at analysing the relation between real trade balance and foreign demand in the case of a small opened economy, which highly depends upon the rest of the world for productive capital. Theoretical analysis allows us to bring forth a kind of “J-curve” effect. Indeed, when foreign demand for domestic goods increases, the country is to import in a first time in order to improve its productive capacities, resulting in worsening trade balance. However, in a second time, once the cumulated capital inventory became sufficient, the trade balance improves under the pressure of domestic exports high growth. The empirical analysis based on Australia from 1982 (1) to 2001 (1) supports this theory. We show there are negative short term and positive long term elasticities.