The Real Exchange Rate, Production Structure, and Trade balance: The Case of Bangladesh

This paper develops a macroeconomic model with tradable and nontradable goods and then analyses the movement of both the real exchange rate and trade balance in Bangladesh for the period 1973-1996. Statistical data show that a sustained economic growth of about 4.5 per cent per annum since the mid-1970's and the continued inflows of foreign capital -foreign aid and overseas worker's remittances- have caused an appreciation of the real exchange rate by increasing the relative demand for non-tradables. The increase in the relative demand for non-tradables has brought about structural change in both output and employment in favour of the non-tradable goods sector. For the external sector of the economy, empirical results suggest that as the appreciated real exchange rate did not switch demand from nontradables to tradables because the demand for each of these goods appears price inelastic, the trade balance position, instead of deteriorating, has shown an improvement since the early 1990s.