Abstract
The small country assumption affects the modelling of the export demand and export price equations. A large (monopolistic) country can set its export price as a mark-up over marginal cost, because it has market power. In contrast, small countries have to deal with competition which forces prices down to the price level of foreign competitors; prices are exogenous. Another possibility is the case in which a small country wants to preserve market shares in foreign markets, this results in fully endogenous pricing. This paper tests the small country export hypothesis for the Dutch economy using a long-run VAR-model. The estimated VAR-model includes two long-run equilibrium relationships, which can be identified as an export supply and export demand equation. Restrictions on the variables are used to test the various hypotheses concerning the long-run supply relationships.
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