This paper presents a theoretical analysis of two key features of international data: countercyclical movements in net exports and the asymmetric cross-correlation between the trade balance and the terms of trade, which is referred to as the S-curve. The authors use a two-country stochastic growth model to explain these phenomena, emphasizing the role of capital formation and productivity shocks. They find that the trade balance is countercyclical and that the terms of trade are negatively correlated with current and future movements but positively correlated with past movements. The S-curve shape is attributed to the dynamic response of the economy to productivity shocks, which lead to temporary investment booms and trade deficits during periods of high output. The paper also highlights the importance of the general equilibrium perspective in understanding the relationship between trade and relative prices, as the source of fluctuations critically affects these correlations. The authors compare their theoretical model to empirical data from 11 OECD countries, finding that the model generates the observed properties of the trade balance and terms of trade. They also discuss the implications of different types of shocks, such as government spending shocks, and show that the cross-correlation function can take different shapes depending on the source of fluctuations. The paper concludes that the S-curve and countercyclical movements in trade are robust features of the theory, as they depend on the persistence of productivity shocks and the dynamics of capital formation. The authors also identify two anomalies between the theory and the data: the smaller variability of the terms of trade in the model compared to the data and the consumption/output correlation anomaly, where the correlation of consumption across countries is generally smaller than that of output. These findings contribute to the understanding of international business cycle dynamics and highlight the importance of considering the source of fluctuations in analyzing trade and price movements.This paper presents a theoretical analysis of two key features of international data: countercyclical movements in net exports and the asymmetric cross-correlation between the trade balance and the terms of trade, which is referred to as the S-curve. The authors use a two-country stochastic growth model to explain these phenomena, emphasizing the role of capital formation and productivity shocks. They find that the trade balance is countercyclical and that the terms of trade are negatively correlated with current and future movements but positively correlated with past movements. The S-curve shape is attributed to the dynamic response of the economy to productivity shocks, which lead to temporary investment booms and trade deficits during periods of high output. The paper also highlights the importance of the general equilibrium perspective in understanding the relationship between trade and relative prices, as the source of fluctuations critically affects these correlations. The authors compare their theoretical model to empirical data from 11 OECD countries, finding that the model generates the observed properties of the trade balance and terms of trade. They also discuss the implications of different types of shocks, such as government spending shocks, and show that the cross-correlation function can take different shapes depending on the source of fluctuations. The paper concludes that the S-curve and countercyclical movements in trade are robust features of the theory, as they depend on the persistence of productivity shocks and the dynamics of capital formation. The authors also identify two anomalies between the theory and the data: the smaller variability of the terms of trade in the model compared to the data and the consumption/output correlation anomaly, where the correlation of consumption across countries is generally smaller than that of output. These findings contribute to the understanding of international business cycle dynamics and highlight the importance of considering the source of fluctuations in analyzing trade and price movements.