A Model of Trade and Exchange Rates

Abstract

Publisher Summary This chapter describes a model of world trade and exchange rates. The modeling effort has focused on combining research on individual equations into a logically consistent empirical model. The model is designed to give projections of trade volume and exchange rates, given various assumptions on alternative developments in the economies of the organization for economic cooperation and development (OECD), developing countries, and centrally planned economies (CPEs). The model covers 26 regions, of which 23 are members of the OECD. The present model is not a closed system; it contains equations for international trade and exchange rates. To operate, the model must be linked to a set of country macromodels or must be driven by exogenous time series for real gross domestic product (GDP) and domestic production costs. It is designed to project changes in the pattern of international trade in goods and services. The channels, through which the trade patterns change, are relative price changes and differential rates of growth in the domestic economies. The changing volume and patterns of trade would determine the current-account position, net foreign assets, and movements of the exchange-rate and/or official-reserves position of a country. Exchange-rate changes affect imports through the relative prices of foreign and domestic goods and affect exports through the relative level of the export prices of competitors. Exchange rates are determined by countries' holdings of net foreign assets, and holdings of assets in other countries.