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The Effects of Foreign Price Uncertainty on Australian Production and Trade

Author

Listed:
  • Elie Appelbaum

    (York University, Canada)

  • Alan D. Woodland

    (Faculty of Economics and Business, University of Sydney)

Abstract

This paper provides a framework for the empirical analysis of the role of uncertain international prices for the Australian economy’s production sector and its international trade. We model the movement of traded goods prices via a bivariate GARCH model and embed this within an expected utility maximizing model of the production sector. We find that the empirical results are consistent with expected utility maximization and that the hypothesis of risk neutrality is soundly rejected. Estimates of the effects of changes in expected prices and volatility of traded goods prices upon production decisions and the return to capital are presented and discussed, as are the impacts of changes in output growth of Australia’s major trading partners. The overall conclusion is that price uncertainty matters for the Australian production sector.

Suggested Citation

  • Elie Appelbaum & Alan D. Woodland, 2008. "The Effects of Foreign Price Uncertainty on Australian Production and Trade," Working Papers 2008_03, York University, Department of Economics.
  • Handle: RePEc:yca:wpaper:2008_03
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    File URL: http://dept.econ.yorku.ca/research/workingPapers/working_papers/2008/trade.pdf
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    References listed on IDEAS

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    Cited by:

    1. Hiroshi Nakamura & Naohiko Wakutsu, 2019. "Reducing pharmaceutical reimbursement price risk to lower national health expenditures without lowering R&D incentives," International Journal of Economic Policy Studies, Springer, vol. 13(1), pages 75-88, January.
    2. Appelbaum, Elie & Kohli, Ulrich, 1998. "Import-Price Uncertainty, Production Decisions, and Relative Factor Shares," Review of International Economics, Wiley Blackwell, vol. 6(3), pages 345-360, August.
    3. Nakamura, Hiroshi & Wakutsu, Naohiko, 2020. "Reducing Reimbursement Drug Price Risk to Enhance R&D Incentives without Raising Drug Prices/Expenditures: Implications of Simulations Based on Questionnaire Survey of Pharmaceutical Companies in Japa," Health Policy, Elsevier, vol. 124(7), pages 714-720.
    4. Elie Appelbaum & Aman Ullah, 1997. "Estimation Of Moments And Production Decisions Under Uncertainty," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 631-637, November.
    5. Andrew Muhammad, 2015. "Price Risk and Exporter Competition in China's Soybean Market," Agribusiness, John Wiley & Sons, Ltd., vol. 31(2), pages 188-197, April.

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    More about this item

    Keywords

    Price uncertainty; production under risk; expected utility maximization; international trade;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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