Accounting for supply, integration and income in foreign trade

Abstract

This paper provides alternative estimates of export and import demand functions. It is suggested that previous estimates of export and import functions may be biased since they ignore factors such as the integration of markets through customs unions and supply effects. The results in this paper reveal that when these factors are incorporated into the model, the estimated income elasticities of exports and imports decline substantially and trade flows are found to be more responsive to unanticipated variations in income. The analysis further reveals that the degree of integration in markets is closely linked to the level of economic growth.