EXPORT SUPPLY AND IMPORT DEMAND ELASTICITIES IN THE JAPANESE TEXTILE INDUSTRY: A PRODUCTION THEORY APPROACH

Abstract

Agricultural goods are often treated as final goods in applied agricultural trade models. However, many agricultural traded goods are intermediate in nature. In this paper a production theory approach is applied in deriving export supply and import demand functions for the Japanese textile industry. The production theory approach derives import demand and export supply functions from the assumption of profit maximizing (cost minimizing) behavior. The behavioral implications of the profit maximization framework are used to specify producer supply and demand functions which are consistent with economic theory. Flexible functional forms are estimated in the econometric model and the concavity restrictions implied by economic theory are checked and imposed. Elasticities derived from the production theory approach are also compared with results based on a single equation specification of the aggregate import demand equation. A major shortcoming of the single equation approach is the lack of theoretical guidance for choosing the appropriate specification.