Income and price elasticities of foreign trade flows: econometric estimation and analysis of the U.S. trade deficit
This paper builds, estimates. and simulates a world trade model to provide a quantitative analysis of the behavior of the U.S. trade deficit. A key feature of this model is that international trade imbalances add up to zero. The analysis estimates income and price elasticities for bilateral import equations, tests for the properties of the error term, for parameter constancy, and for the choice of dynamic specification. The paper also reexamines the structural asymmetries in elasticities noted by Houthakker and Magee and tests whether the Marshall-Lerner condition holds. The reliability of the model as a whole is assessed with residual-based stochastic simulations. The paper finds that changes in relative prices account for the bulk of the deterioration of the U.S. trade account, that reliance on either foreign or domestic growth to eliminate the U.S. external imbalances entails significant changes in real income, and that the speed with which U.S. net exports respond to exchange rate changes is sensitive to minor changes in ownprice elasticities.
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