Terms of trade and real domestic income: New evidence from South and Southeast Asia

Studies that examine the long-run impact of terms of trade on economic growth mostly indicate that an increase in the terms of trade (TOT) results in higher economic growth and a decrease in TOT results in lower growth. We examine this assertion in the context of eight South and Southeast Asian emerging economies. Economic growth over the last three decades has been impressive in the region though TOT has shown an overall declining trend. Using panel cointegration and pooled mean group estimation techniques, we establish a long-run relationship between TOT and income, and TOT and investment. Our Fully Modified OLS results provide adequate evidence of the long-run relationship of TOT with income and investment in South and Southeast Asia. Despite a positive relationship, TOT movements do not exert a significantly large impact on income in the short run.