The NIS and RER affect the productive structure

The NIS and RER affect the productive structure, which in turn, influences directly the export basket, changing the international trade elasticities. It is noteworthy that despite the precursors authors have theoretically emphasized this relationship, only recently some works have advanced in the explanation (including the construction of formal approaches and the expansion of empirical research) of which mechanisms of transmission act between productive structure and imports/exports income elasticities (e.g., Araujo and Lima, 2007; Gouvêa and Lima, 2010; Missio and Jayme Jr., 2012). This paper is organized as follows: Section 2 presents Kaldor–Thirlwall–Dixon model. Section 3 presents new developments of that model by the introduction of the elasticities endogeneity the full details and the NIS role. In Section 4 it is presented an extension of the analysis based on new definitions for the real exchange rate and NIS role as well as a function that captures the endogeneity of productivity in the industrial sector. In Section 5 is presented the analysis of long-term stability of the model. Finally, in the last section the concluding remarks are presented.
The Kaldor–Dixon–Thirlwall model Originally, Dixon and Thirlwall (1975a) present a model explaining the differences in the international or inter-regional economic growth. This model is based on the principle of cumulative causation and provides an accurate explanation for the persistence of different growth rates over time. The cumulative causation model was outlined by Kaldor (1966, 1970) and first formalized by Dixon and Thirlwall (1975b). Later, the model was extended based on Thirlwall (1979), including the assumption that growth is restricted by the intertemporal equilibrium of the balance of payments (BOP). Formally, it is possible to describe it by the following equations:where is the output economic growth rate in the period , is the exports growth rate and is the product growth elasticity in relation to the exports growth rate. This equation describes the assumption of export led growth.where () is the domestic price growth rate (foreign); is the exports growth rate; represents the nominal exchange rate variation; is the export price elasticity (); is the export income elasticity () and is the world income growth rate. This equation represents the export demand, where and are exogenously determined.where is the nominal wage growth rate, is the average work productivity growth rate and is the mark up growth rate calculated as a margin over work costs. This equation describes domestic goods price growth rate determined by a markup rule.where is the work productivity autonomous growth rate, λ is the elasticity of the productivity growth rate in relation to economic growth rate, in other words, the Verdoorn coefficient. With this formulation the equation presents the existence of a regular association between the output growth rate and the productivity growth rate;where is the imports growth rate; is the output domestic growth rate in the period ; is the price import elasticity (); is the income import elasticity (). This equation describes national demand import.this equation describes the trade balance equilibrium. The Dixon and Thirlwall (1975a) model is given by Eqs. (1)–(4). The fundamental equation expresses the Verdoorńs Law, which admits the cumulative and circular growth. In this context, the domestic growth raises work productivity, reducing the domestic price goods, which in turn, takes the economy to higher exports rates. The model points out Kaldor’s arguments about the exports growth rate as well as the increasing return of scale in manufacture sector as the main forces of countries divergent growth rates (Britto and Romero, 2011). In this sense: Substituting Eqs. (2)–(4) in Eq. (1), the domestic growth rate is given by: In Eq. (7), the domestic output growth rate varies positively in relation to the autonomous productivity growth rate, foreign prices growth rate, nominal exchange rate depreciation, world income growth rate and the demand income elasticity for exports. The output economic growth rate varies negatively in relation to nominal wages and the mark up growth rate. Besides, the Verdoorńs coefficient (λ) determines the cumulative and circular growth. Nevertheless, its existence is not sufficient to explain countries divergent growth rates, which are related to distinct λ levels, ceteris paribus.