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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- Hickman, Bert G. & Lau, Lawrence J., 1973. "Elasticities of substitution and export demands in a world trade model," European Economic Review, Elsevier, vol. 4(4), pages 347-380, December.
- Brown, Bryan W & Mariano, Roberto S, 1984. "Residual-Based Procedures for Prediction and Estimation in a Nonlinear Simultaneous System," Econometrica, Econometric Society, vol. 52(2), pages 321-43, March.
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- Fair, Ray C., 1986. "Evaluating the predictive accuracy of models," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 3, chapter 33, pages 1979-1995 Elsevier.
- Haynes, Stephen E & Stone, Joe A, 1983. "Secular and Cyclical Responses of U.S. Trade to Income: An Evaluation of Traditional Models," The Review of Economics and Statistics, MIT Press, vol. 65(1), pages 87-95, February.
- Gagnon, Joseph E., 1989.
"Adjustment costs and international trade dynamics,"
Journal of International Economics,
Elsevier, vol. 26(3-4), pages 327-344, May.
- Khan, Mohsm S. & Ross, Knud Z., 1977. "The functional form of the aggregate import demand equation," Journal of International Economics, Elsevier, vol. 7(2), pages 149-160, May.
- Houthakker, Hendrik S & Magee, Stephen P, 1969. "Income and Price Elasticities in World Trade," The Review of Economics and Statistics, MIT Press, vol. 51(2), pages 111-25, May.
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