Determination of manufacturing exports in the euro area countries using a supply-demand model

In recent decades the weight of exports in economic activity has been increasing. Hence great importance is given to analysing the determinants of their behaviour. When such analysis is carried out, it often considers the determining variables to be only those that affect export demand, particularly competitiveness and external demand. Thus it does not take into account the factors that can influence the supply of exports, which is usually assumed to have infinite elasticity, i.e. export firms stand ready to supply any product quantity demanded of them at the prevailing market price, over which they have no control. However, this approach has certain limitations, since information on supplier behaviour is disregarded prematurely without checking its possible role in the behaviour of foreign sales. This article aims to advance in export analysis, allowing foreign sales to influence export prices. For this purpose, a two equation supply-demand model is estimated in which prices and quantities are determined jointly, so as to enable determination of the extent to which supply is important in explaining the quantity exported by a country. In particular, a two-equation multivariate model with an error correction mechanism is estimated for eight euro area countries with quarterly manufacturing export data since the beginning of the 1980s. The article has the following structure: Section 2 develops the theoretical model; Section 3 describes the variables used and analyses their behaviour during the sample period; Section 4 sets forth the econometric results; Section 5 shows simulation exercises; and, finally, Section 6 summarises the main conclusions.