Import Demand Elasticities Research Articles

Thoughts on balance-of-payments-constrained growth after 40 years

This paper considers how Thirlwall's balance-of-payments-constrained growth model has fared over the preceding 40 years. Issues dealt with include how the model fits into Harrod's closed-economy dynamic model; whether the model is a tautology; the role of the exchange rate and terms of trade in influencing the long-run growth rate, and whether capital inflows make any difference to the long-run predictions of the model. The conclusion is that it is mainly the structure of production and trade that determines the long-run growth rate of countries, within a balance-of-payments equilibrium framework, as determinants of the income elasticities of demand for exports and imports.

Agriculture trade restrictiveness in Canada: How important are the cross effects?

AbstractA trade restrictiveness index (TRI) aggregates an entire protection structure into a single uniform measure that is consistent with trade theory and reflects the extent of policy interventions on trade or welfare. Although there are several variants of a TRI, all approaches aggregate protective measures using weights that depend on import demand and export supply elasticities; some studies ignore cross‐price effects while others account for them. This study measures the degree of bias introduced by ignoring cross effects. It provides a practical approach to account for demand‐ and supply‐side cross‐price effects in a multi‐commodity TRI setting. This approach is illustrated with a case study of distortions in the Canadian crop and livestock sector. Domestic demand and supply cross effects are approximated using a “constant differences of elasticities of substitution” functional form. On average, over the period 1996–2016, we find that cross‐price effects do make a difference, and that including them makes the TRI 27% higher than an approach which ignores them. Furthermore, both TRI approaches produce indices that are higher and more variable than the OECD's percentage Producer Support Estimate (PSE) that measures policy transfers as a share of gross farm receipts. The fundamental differences between a TRI and PSE% is driven by market price support for milk.

Import demand in heterogeneous panel data with cross-sectional dependence

ABSTRACTWe investigate the long-run income and price elasticity of import demand functions with a heterogeneous unbalanced panel of 34 countries over the period 1985:q1-2018:q3. To estimate world elasticities the model is tested with the activity variables derived from the theoretical and empirical literature: GDP, GDP minus exports, Private Demand, Aggregate Domestic Demand, National Cash Flow, and Import intensity-Adjusted Demand (IAD). First, we evaluate time series properties using second generation panel unit root and cointegration tests. Second, we rely on the dynamic common correlated effects mean groups (CCEMG) estimator to deal with cross-sectional dependence (CSD). We find that the IAD, whose world elasticity is close to one, is the best performing specification. Our results confirm that the most appropriate activity variable to assess import demand should encompass intermediate goods as suggested by the recent literature on global supply chains. Moreover, we partially solve the puzzle of the recent trade slowdown since, taking stock of the role of intermediates, the time needed to resort to the long run equilibrium in the aftermath of a global turmoil is greater than that predicted by previous studies.

Demand for Imports and Components of Final Expenditure: An Empirical Study with Special Reference to the Korean Import Demand Function

This paper presents a detailed empirical investigation of Korea’s demand for imports. In particular, our study provides fresh estimates of partial elasticities of demand for imports with respect to each key component of final expenditure including final consumption expenditure, and expenditure on capital formation. A Johansen multivariate co-integration analysis is employed on the post-global financial crisis quarterly macroeconomic data such as final consumption, gross fixed capital formation, exports and relative import prices for the sample period 2009-2018. In support of the empirical framework used in this study, we have found significant differences to exist between various long-run partial elasticities of demand for imports while import elasticity of demand with respect to expenditure on fixed capital formation is found to be negative. This latter result appears to imply that incremental increases in capital formation can provide an effective mechanism for reducing reliance of Korea on imports in the long run. According to the short-run forecasting model, we have found that the current period changes in the demand for imports are related only to the previous period changes in relative price of imports.

The Balance of Payments and Russian Economic Growth

Based on a demand-side approach, Thirlwall’s law claims that, in the long-run, economic growth is constrained by the balance of payments. Income elasticity of demand for exports should be greater than income elasticity of demand for imports in order to grow faster than the limit imposed by export demand. According­ly, accurate estimations of income elasticities are necessary to identify these bounds. This research estimates export and import functions using bilateral trade data between Russia and 53 of its major partners. Then, we empirically test the validity of Thirlwall’s law over the years 1996-2016, generalizing Thirlwall’s model in a bilateral panel framework. In addition, export and import functions are estimated taking into account export and import composition, controlling for key sectoral effects on aggregate elasticities. Using dynamic panel data models, the findings suggest that, on average, the Russian economy has been growing faster than what Thirlwall’s law predicts. The sectoral composition of the Russian external sector has eased the external constraint to growth. Russian exports still significantly consist of oil and gas, price inelastic goods, with positive effects on trade balance over the period of study. However, in a transition toward green energies, the allocation and investment of exports revenues is a key factor to address future scenarios where carbon-based resources lose relevance.

Import Demand Elasticities Based on Quantity Data: Theory, Evidence and Implications for the Gains from Trade

Correct estimates of import demand elasticities are essential for measuring the gains from trade and predicting the impact of trade policies. We show that estimates of import demand elasticities hinge critically on whether they are derived using trade quantities or trade values, and this difference is due to properties of the estimators. Using partial identification methods, we show theoretically that the upper bound on the set of plausible estimates is lower when using traded quantities, compared to the standard approach using trade values. Our theoretical predictions are confirmed using detailed product-level data on U.S. imports for the years 1993--2006. Our proposed method using traded quantities leads to smaller point estimates of the import demand elasticities for many goods and imply larger gains from trade compared to estimates based on trade values.

Export Demand Elasticity Estimation for U.S. Cotton

U.S. cotton exports have been characterized by large fluctuations in the last two decades. However, the latest available elasticity estimates of U.S. cotton exports are from 1982. New and more precise estimates of export demand elasticities for U.S. cotton are necessary to forecast future U.S. cotton exports and accurately analyze potential political policy and market changes. This study provides updated estimates of the elasticity of foreign demand for U.S. cotton in selected major cotton importing countries using an Armington framework for the years 1978 to 2017. Additionally, this study examines the evolution of the export demand elasticities over time in a dynamic framework of time-varying parameters (TVP) based on the Kalman filter methodology. Our results indicate that short-run price elasticities of foreign demand for U.S. cotton are price inelastic for major cotton importing countries, except for Pakistan. Countries with lower export demand elasticities are associated with relatively large U.S. cotton market shares for these countries. The import demand elasticity for U.S. cotton in recent years is becoming less elastic, implying that cotton import demand in major importing countries has become less price sensitive than it was historically, and the U.S. has competitive advantages in these major cotton importing countries over other suppliers.

Who Benefits from the Export Tax Rebate Policy? Evidence from the Chinese Fishery Sector

The export tax rebate policy in China is under dispute, especially in agricultural sectors, as it is claimed that it works as a subsidy for foreign consumers rather than domestic producers. Surprisingly, little research has investigated the distribution of benefits of this policy. In this paper, we examine this in a partial equilibrium framework. We find that the effects of the export tax rebate on domestic producers depend on the relative magnitude of the export supply and import demand elasticities. The model is then applied to the Chinese fishery sector, a perfect example to illustrate the policy debate. Simulation results indicate that, although the export tax rebate increases Chinese producers’ welfare, foreign consumers capture most of its welfare benefits (60%-75%). Furthermore, the results imply that the welfare gain for Chinese producers is overestimated if vertical linkage between the retail and the farm markets is ignored.

Who Benefits from the Export Tax Rebate Policy? Evidence from the Chinese Fishery Sector

The export tax rebate policy in China is under dispute, especially in agricultural sectors, as it is claimed that it works as a subsidy for foreign consumers rather than domestic producers. Surprisingly, little research has investigated the distribution of benefits of this policy. In this paper, we examine this in a partial equilibrium framework. We find that the effects of the export tax rebate on domestic producers depend on the relative magnitude of the export supply and import demand elasticities. The model is then applied to the Chinese fishery sector, a perfect example to illustrate the policy debate. Simulation results indicate that, although the export tax rebate increases Chinese producers’ welfare, foreign consumers capture most of its welfare benefits (60%-75%). Furthermore, the results imply that the welfare gain for Chinese producers is overestimated if vertical linkage between the retail and the farm markets is ignored.

The impacts of China on economic growth: Evidence for Brazil, Chile, and Peru

ABSTRACTThis study empirically analyzes the direct impacts derived from the swift increase in exports to China (referred to as “the impact of China”) on the economic growth of three selected South American countries, Brazil, Chile, and Peru, during the commodity boom between 2001 and 2008. The results stemming from the balance-of-payments-constrained growth model suggest that the magnitude of China’s impact was less than 1 percent, although it ranged from the largest to the second largest impact among all trading partners for the three countries. The estimated balance-of-payments growth rate of domestic income is lower than the real growth rate of domestic income. This is because the growth rates of the export volumes were not sufficient even during the commodity boom, on account of the continued increasing trends of income elasticity of demand for imports. Furthermore, the income elasticities of demand for imports from China were especially high. Therefore, the three countries will continue to face further increase in the income elasticity of demand for imports as well as a stagnant growth rate of export volumes. Thus, the balance-of-payments position will continue to be the main growth constraint for these countries.

The income elasticity of import demand: Micro evidence and an application

We construct a synthetic panel of household expenditures from the Consumer Expenditure Survey (CEX) and use the Quadratic Almost Ideal Demand System to estimate expenditure shares and income elasticities of demand that vary by good-time-income. We show that the size and distribution of income shocks drives expenditure change in a manner that varies profoundly across traded goods. Our estimates of expenditure shares and income elasticities could be useful in many applications that seek to explain changes in trade behavior from the demand side, and indicate the strong sensitivity of trade to changes in the tails of the income distribution. We explore an application involving the Great Trade Collapse. Income-induced expenditure changes are positively correlated with the cross-good pattern of import changes, generating a predicted change as much as 40% as large as the raw variation in import declines.

Short-Run and Long-Run Food Import Elasticities with Persistent Trading Habits

This paper provides estimates and explores the role of own price import demand (Armington) elasticities between different source countries for five agricultural commodities in a framework that incorporates temporal dimension formulated as trading habit persistence. The estimations employ FAO’s bilateral food commodity trade database, complemented with importer and exporter country characteristics from other data. The results support the hypothesis that trade patterns are persistent the adjustment following price changes takes effect with delays. Apart from the evidence for the presence of habit persistence and hence different short and long-term elasticities in general, significant differences between countries are also evidenced, in particular between high- and low-income countries and between main geographic areas. Consistently with the barriers for market entry considerations we also observe higher persistence downwards than upwards.

How (a)symmetric is the response of import demand to changes in its determinants? Evidence from European energy imports

Energy imports are crucial for European countries, yet little is known about determinants of their import demand. We update long-outdated estimates of import demand elasticities using recent data for crude and derived energy products and contribute to the debate on the asymmetry of import demand by using recent developments in econometric modelling. Our results have important implications for the geopolitics of energy markets in Europe. (Asymmetric) Income seems to be the most relevant determinant of import demand; Economic growth and fossil fuel consumption are correlated, even in the context of the European agenda towards renewables. Our results suggest that European economic recovery may derail the drive for lower fossil consumption, and that changes in the natural gas market may further complicate this drive, especially regarding Russia as the primary supplier to the Eurozone.

A general equilibrium analysis of Canada’s national policy

In this paper, we study the impact of Canada’s adoption of protectionist trade policy in 1879 on Canadian welfare. Under the National Policy, the Canadian average weighted tariff increased from 14% to 21%. The conventional view is that this was a distortionary policy that negatively affected Canadian welfare. We argue that this view is incomplete because it ignores general equilibrium effects. Using a multi-industry general equilibrium model with differentiated goods, we show that tariffs’ impact on welfare can potentially be positive, even for small open economies, due to their impact on domestic terms of trade and government revenues. We apply these theoretical insights in a reassessment of the static impact that the National Policy had on Canadian welfare in 1879, using newly compiled granular trade and production data, and newly estimated historically contemporaneous import demand elasticities. Our results suggest that, although a multilateral move to free trade would have resulted in the best welfare outcome for Canadians, the National Policy’s tariff increases actually improved Canadian welfare by approximately 0.15% of GDP in 1879 – an amount equivalent to approximately $2.3 billion 2016 USD.

LIML estimation of import demand and export supply elasticities

ABSTRACTI apply limited-information maximum likelihood (LIML) to estimate import demand and export supply elasticities for a range of eurozone countries. The results highlight inconsistencies in the parameters estimated by LIML relative to an estimator that is robust to heteroskedasticity. The nature of the structural equations reveals complications generated by the limiting behavior of the parameters that can be replicated in finite samples. The results of simulations underscore improvements in parameter estimates in a three-dimensional panel, suggesting that the problem of limiting behaviour can be overcome in larger dataset/panels.

Exchange rate movements and export market dynamics: evidence from China

AbstractThis paper highlights the relationship between foreign exchange rate fluctuations and firms’ export market dynamics using a Chinese firm-level production data and a firm-level trade data over the period of 2000–2006. This study adopts a discrete-time survival model in our empirical investigation and further executes several extensions and robustness checks to the baseline results. The main results of the paper can be summarized as follows: First, an exchange rate appreciation increases the likelihood of export market exit and decreases the probability of export market entry. Second, high productivity firms are less likely to exit from export markets and more likely to enter export markets in the period of exchange rate appreciation. Third, exchange rate appreciation decreases the likelihood of export market entering and increases the likelihood of export market exiting more for private-owned firms, young firms and non-eastern firms. Finally, other sources of heterogeneity, such as extensive margins, import demand elasticity, different destinations, U.S. dollar peg, and the liberalization of trading rights is also important to the effects of exchange rate changes.

The Greek economy under the twin-deficit pressure: a demand orientated growth approach

This paper uses an alternative growth approach in line with Thirlwall’s model in order to predict economic growth in Greece taking into account internal and external imbalances caused by public deficit/debt and lack of trade competitiveness. It is shown that the simple Thirlwall’s Law (given by the product of the ratio of the income elasticities of demand for exports and imports, and the growth of foreign demand) over-predicts real growth in Greece while the more complete extended model, makes a closer prediction which is consistent with the high deficit/debt and current account deficit experienced in this country. The simulation approach shows that the most efficient policy to attain higher growth is to reduce external imbalances while policies to reduce internal imbalances are low growth enhancing.

Bank Credit and Aggregate Import Demand in South Africa: An Autoregressive Distributed Lag Approach

This study reformulated the aggregate import demand function for South Africa by incorporating a financial variable, bank credit. The study used the bounds testing approach for cointegration and the autoregressive distributed lag models to estimate short-run and long-run elasticities of aggregate import demand. The cointegration results confirm a long run relationship between the quantity of imports and the explanatory variables. Although bank credit has a positive impact on aggregate imports, it is statistically insignificant. It is statistically significant in the short-run. Our results suggest that bank credit is insufficient as a policy instrument for longterm import demand in South Africa. It can only be useful in managing the South African external balance in the short-run.

Are the Transition Economies Balance-of-Payments Constrained? An Aggregate and Multisector Approach Applied to Central and Eastern Europe

The balance-of-payments (BoP) can act as a constraint on the output growth rate because it limits the growth of demand. This article focuses on verifying whether the hypothesis that BoP constrains growth is suitable for explaining the growth performance of several transition economies in Central and Eastern Europe that joined the European Union after 2004. According to Thirlwall’s law, the BoP equilibrium growth rate in an economy is determined using the ratio of the income elasticities of demand for exports and imports and the growth in foreign demand. The results obtained are compared with the multisector version of Thirlwall’s law as an alternative approach that considers the structure of the economy and how specialization affects BoP-constrained growth. The results show that almost all the transition countries in the sample grew at a higher rate than is consistent with the BoP equilibrium and that the multisector version of this approach predicts actual growth in these countries.

Zimbabwe’s Trade Performance Under Alternative Trade Policy Regimes

This study examines Zimbabwe’s export and import performance under alternative trade policy regimes, from 1976 to 2014. Taking into account export and import volumes, gross domestic product (GDP), price of exports and imports, foreign income, real effective exchange rate and policy changes, log-linear errorcorrection models were adopted to estimate export supply and import demand elasticities. The study concludes that the relationship of exports and imports to GDP is significantly positive, while foreign income has no significant effect. A devaluation is estimated to have a significantly negative effect on imports in the short-term. Though highly inelastic, the effect of prices of imports on import demand is estimated to be significantly negative in the short- and long-term, and that of exports on export supply is positively significant in the short-term. The adoption of outward-oriented strategies was estimated to result in a 13.86 per cent increase in exports in the long-term, and a 32.3 per cent increase in imports in the short-term between 1990 and 1995 alone, and an additional 33.62 per cent between 1996 and 2000. The analysis also reveals that adopting a multi-foreign currency regime will only significantly influence export supply in the long-term.