Changes in the Terms of Trade and Sectoral Reallocation of Labor: The Case of Guyana, Jamaica, and Trinidad and Tobago

Paper presented at the Options for the Caribbean After the Global Financial Crisis Conference Bridgetown, Barbados, January 27–28, 2011

This paper quantifies the consequences of long-term changes in the terms of trade on the growth rate of real income in Guyana, Jamaica, and Trinidad and Tobago. We find that magnitudes of both the long-term changes in the terms of trade and the responses of income growth rates vary considerably across these three countries. We then develop a model that links a change in the terms of trade to a change in income through the degree of sectoral reallocation of labor. Using this model, we analyze whether specific fiscal and trade policy responses cushion or amplify the impact of terms of trade on income. In a calibrated version of the model, we demonstrate that the degree with which an economy reallocates its labor across sectors is not necessarily a good indicator of its vulnerability to changes in its terms of trade.

Author(s): Talan Iscan, Andrew Powell, Alessandro Rebucci