Background:

Following Kaldor (1978) and Thirlwall (1979), McCombie (1985) advanced a foreign trade supermultiplier that positively influences other components of aggregate demand of a Balance-of-Payments constrained economy. In this paper, it is shown that net capital stock also exerts a super-multiplier effect, which, contrary to the exports multiplier, happens to be independent from the income elasticity of the demand for imports.

Methods:

A theoretical model is here presented where given the exports and net capital stock levels, the income level is adjusted to get trade balance equilibrium. We carried out econometric estimations using a fixed effect model and unbalanced panel data to compute the elasticities of both GDP and production for the domestic market vis-à-vis exports and the net capital stock. Our estimations are based on data from six Latin American countries for the period 1951-2015 and the sub-periods prior and after economic liberalization.

Results:

The elasticities of both GDP and production for the domestic market vis-à-vis the net capital stock proved to be higher than the said elasticities with respect to exports.

Conclusions:

Capital accumulation can positively affect the trade balance through economic capacity building and import substitution. Capital accumulation imparts a super-multiplier effect; as Hicks (1950) had pointed out, it makes space for aggregate demand to increase regardless the value of the income elasticity of the demand for imports. McCombie’s foreign trade super-multiplier is valid if and only if the income elasticity of total absorption of goods and services is lower than one. Yet, if such elasticity happens to be higher than one, an increase in exports will call for a reduction of the aggregate demand components other than exports so as to preserve the Balance of Payments dynamic equilibrium.