Measuring the Role of Price in International Trade: Some Further Tests

Abstract

The role of price in international trade continues to be a favorite field of investigation by researchers. The debate on the appropriateness of the use of the single-stage least-squares regression method also continues to draw attention. The present paper, however, makes use of this method and reports some results with respect to certain merchandise items of the Indian foreign trade. It thus claims to minimize errors due to aggregative studies relating to total exports and imports of an economy. MORE THAN one effort has been made to measure the role of price in international trade. What follows are the results of some further tests, based on a study relating to certain individual commodities in which India trades with the world at large. More precisely, this paper reports some results with respect to world demand for Indian tea and Indian import demand for iron and steel, machinery, chemicals, and raw cotton. I have reported elsewhere [2] that the ratio of relative prices between home and world markets has not been found to be significant in explaining India's import demand in the contemporary period, 1950-1961. Nor was the variable found to be significant in explaining world demand for Indian exports during the same time period except in the case of Indian exports to the limited area outside the Sterling, Dollar and OECD countries. I have also reported some results [3] with respect to import demand of India for the historical period, 1900-1946. The relative price variable based on the ratio of home and world price levels was found significant only in the case of intermediate goods, but insignificant with respect to import demand for both consumer goods and investment goods. However, in each case there was room for suspicion that the price effect is often subsumed under the overall income effect in an aggregative import/export function. The levels of disaggregation achieved in each of these studies were not completely satisfactory. It is hoped that the present analysis, being at the level of individual commodities or commodity groups, will help elicit further information in this respect. The selection of individual items of trade for this study is rather arbitrary. On