Thirlwall's Law

Origins and basic logic

Roy Harrod (1933) proposed the trade multiplier, under which a country's output is determined by its exports and its propensity to import. Kaldor (1970) argued that regional and national growth is driven more by external demand, especially export demand, than by supply. Building on these ideas, Anthony Thirlwall (1979) showed that if the real exchange rate does not change much in the long run, the growth rate consistent with current account balance equals the growth of exports (x) divided by the income elasticity of imports (π), or y = x / π. The logic is that a country growing faster than this will see imports outpace exports, and growth will eventually be halted by a balance of payments crisis.

Extensions and implications

Houthakker and Magee (1969) estimated a high income elasticity for Japan's exports and a high income elasticity for Britain's imports, and Thirlwall's law holds that such differences explain cross-country differences in growth. This resembles Latin American structuralist arguments, such as the Prebisch–Singer hypothesis, that primary commodity exporters face structural disadvantages. Thirlwall and Hussain (1982) extended the model to include capital inflows, and Moreno-Brid (1998) added a condition for a sustainable foreign debt ratio. Araujo and Lima (2007) developed a multi-sector version that reflects structural change across industries. The policy implication of this view is that non-price competitiveness, such as product quality and industrial structure, matters more for long-run growth than price competitiveness.

Evidence and critiques

McCombie and Thirlwall (1994) compiled evidence from many countries that actual growth rates are close to those predicted by the law, and McCombie (1997) reviewed the empirical methods. Thirlwall (2011) surveyed more than three decades of research. Krugman (1989), by contrast, argued that causation may run the other way: countries that grow fast for supply-side reasons produce a wider range of goods and therefore appear to have high export income elasticities. Clavijo and Ros (2015) reviewed criticisms that the law is close to a tautology of measurement, along with responses to them. The debate highlights the difference between theories that stress price elasticities, such as the Marshall–Lerner condition, and those that stress income elasticities.

FAQ

What is Thirlwall's law in simple terms?

For a country to grow quickly for a long time, its exports must rise enough to pay for its growing imports, so the pace of export growth and the sensitivity of imports to income set a ceiling on long-run growth.

What are the main criticisms of Thirlwall's law?

Krugman questioned the direction of causation, arguing that fast growth raises export elasticities rather than the reverse, and some critics argue that the law is close to a tautology of measurement.

Sources reviewed: 2026-10-26

References

1. Thirlwall, A. P. (1979). The balance of payments constraint as an explanation of international growth rate differences. Banca Nazionale del Lavoro Quarterly Review, 32(128), 45–53.
2. Harrod, R. F. (1933). International Economics. Cambridge: Cambridge University Press.
3. Kaldor, N. (1970). The case for regional policies. Scottish Journal of Political Economy, 17(3), 337–348.
4. Prebisch, R. (1950). The Economic Development of Latin America and Its Principal Problems. New York: United Nations.
5. Houthakker, H. S., & Magee, S. P. (1969). Income and price elasticities in world trade. Review of Economics and Statistics, 51(2), 111–125.
6. Thirlwall, A. P., & Hussain, M. N. (1982). The balance of payments constraint, capital flows and growth rate differences between developing countries. Oxford Economic Papers, 34(3), 498–510.
7. Krugman, P. (1989). Differences in income elasticities and trends in real exchange rates. European Economic Review, 33(5), 1031–1046.
8. McCombie, J. S. L., & Thirlwall, A. P. (1994). Economic Growth and the Balance-of-Payments Constraint. London: Macmillan.
9. McCombie, J. S. L. (1997). On the empirics of balance-of-payments-constrained growth. Journal of Post Keynesian Economics, 19(3), 345–375.
10. Moreno-Brid, J. C. (1998). On capital flows and the balance-of-payments-constrained growth model. Journal of Post Keynesian Economics, 21(2), 283–298.
11. Araujo, R. A., & Lima, G. T. (2007). A structural economic dynamics approach to balance-of-payments-constrained growth. Cambridge Journal of Economics, 31(5), 755–774.
12. Thirlwall, A. P. (2011). Balance of payments constrained growth models: History and overview. PSL Quarterly Review, 64(259), 307–351.
13. Clavijo, P. H., & Ros, J. (2015). La ley de Thirlwall: una lectura crítica. Investigación Económica, 74(292), 11–40.