The TNT or Australian Model

Crisis, adjustment and poverty in the
Traded-Nontraded Goods (TNT) model
(aka
the Australian or Dependent economy model)
Picture: thanks to AUDNews
As Gillis et al. 2006 point out, “These two qualitiessmallness and openness-are the basis for the Australian or
dependent economy model. It is called the "Australian"
model because it was developed by Australian economists
including W. E. G. Salter, "Internal Balance and External
Balance: The Role of Price and Expenditure Effects."
Economic Record. 635. no. 71 (August 1959): 226-238;
Trevor W. Swan. "Economic Control in a Dependent
Economy," Economic Record 36. no. 73 (March 1960): 5166; and W. Max Corden, Inflation, Exchange Rates and the
World Economy (Chicago: University of Chicago Press.
1977). Australia is considered a small. open economy.”
TNT Approach, Sachs and Larraine
Chapter 21 basic PPF diagram
TNT Approach, Sachs and Larraine
Chapter 21 basic PPF diagram
TNT Approach, Sachs and Larraine
Chapter 21 basic PPF diagram
TNT Approach, Sachs and
Larraine
Chapter 21 basic PPF diagram
TNT Approach,
Sachs and Larraine
Chapter 21 basic
PPF diagram
TNT Approach, Sachs and Larraine
Chapter 21 basic PPF diagram
TNT
Approach,
Sachs and
Larraine
Chapter 21
basic PPF
diagram
TNT Approach,
Sachs and Larraine
Chapter 21 basic
PPF diagram
TNT Approach, Sachs and Larraine
Chapter 21 inflation in TNT model
A fixed Traded/non-traded consumption path TNT diagram
Figure TNT-2: PPF for a small Open Economy
QN , C N
Social or community
Indifference curve
A
qA = - PT/PN
where
PT = ep*
QT, CT
A fixed Traded/non-traded consumption path TNT diagram
Figure TNT-3G: Unemployment in the TNT Model
QN , C N
CN/CT = 1
NT goods CT > QT
E
B
include
roads,
real estate
services
etc.
Trade deficit: (capital
Balanced trade
CT = QT
or aid inflows)
G
F
CT = QT
Trade/CA surplus:
country accumulates reserves
or pays off external debt or
invests capital in other ctys.
Traded goods output & consp QT, CT
Slope of ppf is qA = -PT/PN where PT = ep*
But if economy produces and consumes at G, trade is
balanced by a recession, high unemployment (Greece?)
A fixed Traded/non-traded consumption path TNT diagram
A fixed Traded/non-traded consumption path TNT diagram
Figure TNT-2: Trade Surplus/Deficits when traded
and nontraded goods are consumed in fixed proportions
CN/CT = 1
QN , C N
CT > QT
Trade deficit (capital
or aid inflows)
A
CT < QT
Trade Surplus (capital
Outflow,
QT, CT
A fixed Traded/non-traded consumption path TNT diagram
Key Assumptions of the TNT Model:
1. QN = CN, if not P N rises (inflation) or inside the PPF you can have
unemployment if q does not change fast enough to make QN = CN
2. Small countries take P* as given, but can influence nominal exchange
rate (e.g. pesos or Naira per $US).
3. A completely arbitrary simplifying assumtion here is that C N and CT
(traded and nontraded goods consumption) consumed in equal
Figure TNT-4: PPF for a small Open Economy
QN , C N
CN/CT = 1
E
B
A
The Mechanics
of the TNT
model:
qB
RER appreciates
C
F
qA = - PT/PN
where
PT = ep*
QT, CT
A is for Autarchy, at A with RER qA trade is balanced. Capital inflows or Aid allow the country to
consume above its PPF, at E for example, this creates a trade deficit QT < CT, which is fine, it happens,
but we have a problem: QN < CN but by definition we cannot import nontraded goods…what
happens. The shortage in NT goods raises domestic prices of nontradables PN causing the RER to
appreciate, q falls, moving production up to point E on the PPF. Now we are fine, the trade deficit
is even larger, but inflation abates as nontraded goods prices stop rising.
Figure TNT-4: PPF for a small Open Economy
QN , C N
CN/CT = 1
E
B
A
qB
RER appreciates
C
F
qA = - PT/PN
where
PT = ep*
QT, CT
2. As long as the country produces on PPF there is full employment. Alternatively, by
consuming at point C and producing at F the country exports capital or accumulates
reserves or pays down external debt with full employment...
But if q changes slowly the country may find itself producing inside the the ppf.
With RER qB for example, the country produces at E but it can still balance trade by
consuming at C, but the result is high unemployment in the both industries…
Capital/aid inflows must lead to appreciation of the RER
Figure 6.4a
Capital Inflows appreciate RER
non
traded
goods
QNT = CNT
C
B
A
qB = PT/PNT
Traded Goods
qA
QT
PT = ep*
Figure 6.4: Capital Inflows always cause an appreciation of
the real exchange rate, RER or q = P T/PNT where PT = ep*.
Fixed Exchange Rate: P T is fixed so PN must increase.
(capital inflows are generally inflationary)
Flexible Exchange rate: P T = ep* may fall, or P N may increase.
(capital flows cause Inflation to rise or fall)
Special case, production is below the PPF because RER is hard to
change, CNT = QNT but instide the PPF (unemployment)
Figure TNT-3G: Unemployment in the TNT Model
QN , C N
CN/CT = 1
NT goods CT > QT
E
B
include
roads,
real estate
services
etc.
Trade deficit: (capital
Balanced trade
CT = QT
or aid inflows)
G
F
CT = QT
Trade/CA surplus:
country accumulates reserves
or pays off external debt or
invests capital in other ctys.
Traded goods output & consp QT, CT
Slope of ppf is qA = -PT/PN where PT = ep*
But if economy produces and consumes at G, trade is
Lecture Notes
ECON
5459 CAP
balanced by a recession,
high
unemployment
(Greece?)
19
Capital inflows always lead to Appreciation of RER
Figure TNT-4: PPF for a small Open Economy
QN , C N
CN/CT = 1
E
B
A
qB
RER appreciates
C
F
qA = - PT/PN
where
PT = ep*
QT, CT
Lecture Notes ECON 3235
20
The Dutch Disease involves a shift in the RER
Lecture Notes ECON 3235
21
Dutch Disease Solutions
1. Chile’s structural balance rule: Copper
Stabilization fund see Teresa Daban, 2011,
2. Venezuela: redistribution progams… fiscal
spending on the poor: but can be inflationary…
3. Flexible exchange rates: sterilization, S-Term
capital controls
4. Excess crude funds, flexible fx policy (Uganda
and Nigeria?) Capital inflows and Financial
liberalization can aggravate DD:
Lecture Notes ECON 3235
22
R&R typical
crisis
scenario:
Capital
inflows can
lead to real
estate boom
and trade
deficit
Lecture Notes ECON 3235
23
TNT/Australian/Dependent economy model with a RER adjustment
(RER is slope of Traded-Nontraded PPF)
Capital inflows lead to RER appreciation, always (q falls)
Figure 6.4a
Capital Inflows appreciate RER
NT
C
Goods
QNT = CNT
B
A
qB = PT/PNT
Traded Goods
qA
QT
PT = ep*
Figure 6.4: Capital Inflows always cause an appreciation of
the real exchange rate, RER or q = P T/PNT where PT = ep*.
Fixed Exchange Rate: P T is fixed so PN must increase.
(capital inflows are generally inflationary)
Flexible Exchange rate: P T = ep* may fall, or P N may increase.
(capital flows cause Inflation to rise or fall)
NT sector Productivity Growth attenuates appreciation in q
Figure 6.4b
NonTraded
Goods
C
B
QNT = CNT
A
qB = PT/PNT
qA
Traded Goods
PT = ep*
QT
Figure 6.4B: Capital Inflows cause less RER appreciation if the NT
sector gets a boost in investment as in TWM (2004) .
(RER or q = PT/PNT where PT = ep*)
TNT/Australian/Dependent economy model with a RER
adjustment (RER is slope of Traded-Nontraded PPF)
TNT/Australian/Dependent economy model with a RER
adjustment (RER is slope of Traded-Nontraded PPF)

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