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Growth, Expansion of Markets, and Income Elasticities in World Trade


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  • Yi Wu
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    The Houthakker-Magee effect implies that a country facing unfavorable income elasticities in trade must either grow at a slower rate than its trading partners or experience a trend worsening of its current account and/or depreciation of its real exchange rate. Krugman (1989) first documented the existence of a “45-degree rule” under which relative income elasticities are systematically related to relative growth rates. In this paper, we develop and test an intertemporal current account model in which Krugman’s original 45-degree rule is a special case. The result suggests that secular trends in current accounts and/or real exchange rates are much smaller than one would have projected based on conventional income elasticities.

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    Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/11.

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    Length: 33
    Date of creation: 01 Jan 2005
    Date of revision:
    Handle: RePEc:imf:imfwpa:05/11

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    Keywords: Economic growth; Markets; Economic models; income elasticities; equations; statistics; cointegration; import demand; standard errors; samples; equation; terms of trade; international trade; world trade; export prices; standard deviations; elasticity of substitution; value of exports; trading partners; linear regression; autocorrelation; trade model; import prices; import price; foreign trade; value of imports; econometrics; outliers; export quantity; balance of payments; current account deficit; political economy; bootstrap; standard error; world market; national borders; product differentiation; export growth; output growth; instrumental variables; statistical inference; trade models; vector autoregression; prediction; export performance; bootstrap techniques; aggregate consumption; domestic production; export equations; unit of labor; covariance; trade imbalances; price of imports; trade data; aggregate demand; financial statistics; measurement error; logarithm; outlier; import side; imperfect competition; survey; bilateral trade data; world demand; correlation; linear regressions; competitive market; time series; significance levels; export market; merchandise trade; probability; export price; optimization; bilateral trade; linear trend; export markets; trade flows;


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    Cited by:
    1. Kwack, Sung Yeung & Ahn, Choong Y. & Lee, Young S. & Yang, Doo Y., 2007. "Consistent estimates of world trade elasticities and an application to the effects of Chinese Yuan (RMB) appreciation," Journal of Asian Economics, Elsevier, Elsevier, vol. 18(2), pages 314-330, April.
    2. Kuikeu, Oscar, 2011. "Arguments contre la zone franc
      [Against the cfa franc zone]
      ," MPRA Paper 33710, University Library of Munich, Germany.
    3. Francisco, Ruth & Wan, Guanghua, 2009. "How is the Global Recession Impacting on Poverty and Social Spending? An ex ante assessment methodology with applications to developing Asia," MPRA Paper 18885, University Library of Munich, Germany.


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