Relative PPP and the long-run terms of trade for five Latin American countries: a cointegration approach

Abstract

This paper uses a cointegration approach with an error correction mechanism to examine purchasing power parity with the US, for Brazil, Colombia, Costa Rica, Mexico and Venezuela. A relative version of purchasing power parity (PPP) is tested which includes the possibility of secularly declining or rising long-run real terms of trade. PPP explains the data fairly well for the more diversified economics of Brazil and Mexico but is rejected for the other three economies.