Growth and the Balance-of-Payment Constraint

Thirwall's law posits that a country's economic growth rate (relative to that of the rest of the world) depends on a ratio of its export's income elastcity of demand to that of its imports. Empirical studies of this hypothesis have almost been entirely supportive, but we argue that the method used is flawed due to its reliance on least-squares estimates of the income elasticities. Using the Johansen procedure, we test for a long-run relationship between domestic and world income for the G7 nations and find little evidence that Thriwall's law holds.