Abstract:

Purpose- In so far as financial development that supports the supply-side view as well as the country’s competitiveness, a rapid increase in import price index in comparison to the export price index brings forth the deterioration regarding trade. A similar case also exists in Turkey. The aim of the study is to test the relationship between foreign trade balance and terms of trade in Turkey. Methodology- In this study, the monthly data of terms of trade and foreign trade balance for the period 2005: M1 - 2017: M4 are analyzed for Turkey, and the validity of Harberger-Laursen-Metzler Hypothesis is tested. Findings- The deviations in the short run converge to the long-term equilibrium in approximately 6 months period. In addition, considering the normalized long-term relationship, the 1-unit increase in the terms of trade would cause an average increase of $ 321,335 in the estimated dependent variable, namely, the foreign trade balance. Conclusion- There exists a long-term relationship between the variables, namely, terms of trade and foreign trade balance. Moreover, there is a short-term unilateral causality from foreign trade balance to terms of trade.

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