This study addresses two issues on empirical grounds. What is the role of the real factors in the determination of the real exchange rates? What are the relationships among the terms of trade, real exchange rate, and the current account in an economy? Is there a Harberger-Laursen-Metzler effect, namely a relation in the same direction between the terms of trade defined as the price of import-competing goods in terms of the price of exportable goods, and the current account of a country?It is well recognized that changes in real exchange rate and terms of trade have important consequences for the economic performance of a country. As a proxy for a country's degree of competitiveness in international markets, the real exchange rate measures the cost of domestically producing the tradable goods. Any shift in the real exchange rate, often defined as the price of traded goods in terms of non-traded goods, affects the allocation of resources in the economy and leads to variations in expenditure patterns. For example, a decline in the real exchange rate, the ratio of the price of tradable goods to the price of nontradable goods, shifts resources to the nontradable goods sector, since the decline implies that the country produces the tradable goods in a more costly way.