Nontraded Goods and the Current Account

Abstract

This paper investigates trade balance and current account behavior in response to various shocks when the economy produces and consumes both traded and nontraded goods. Previous analyses of these problems have interpreted current account behavior in terms of tension between parameters that measure intratemporal and intertemporal elasticity, respectively. This paper provides a simple general criterion for whether trade and current account behavior is “perverse”vis‐à‐vis the standard one‐good model results: behavior is perverse if and only if traded and nontraded goods are Edgeworth complements; that is, if the cross‐partial of the instantaneous utility function is positive.