Structural Balance of Trade Deficits in a Small Open Economy with Exogenous Capital Flows: A Monetary Approach*

This paper presents a ‘structural’ balance of trade model which can be interpreted as combining two major building blocks. The first one is identical to the monetary approach to the balance of payments. The second, which explains the price level, consists of the orthodox Scandinavian model of price and wage determination. It is shown that under these assumptions the balance of trade deficit can be broken down into a structural, an imported, and a ‘home‐made’ component. A n empirical illustration of the structural balance of trade model is given for the New Zealand economy.