Academic journal article IUP Journal of Applied Economics

Estimating Export Equations for Developing Countries

Academic journal article IUP Journal of Applied Economics

Estimating Export Equations for Developing Countries

Article excerpt

The paper uses annual time series data to estimate the price and income elasticities of export demand for three developing countries-Fiji, Papua New Guinea (PNG) and Bangladesh. The LSE-Hendry's general-to-specific approach (known as GETS) is employed by using correct specifications of relative price to find the relevant export elasticities. Income elasticities of export demand are found to be unity for all the three countries. The price elasticity estimates, in contrast, have correct signs, and give plausible magnitudes. Based on the results, exports in developing countries can be seen as an engine for growth, and thus, export promotion policies are necessary to improve trade balance and to achieve greater export-based growth.

(ProQuest: ... denotes formulae omitted.)


In formulating export promotion policies, the knowledge of relevant elasticities is essential. This is because higher elasticities allow a basis for greater export-based growth policies. A sizeable number of empirical studies have been carried out in this field in order to estimate export equations for individual countries and to determine their price and income elasticities. The purpose of estimating export equations has not only exclusively been to test certain theoretical hypothesis, but also to help policymakers in improving the evaluation of potential policy options.

Exports is potentially seen as a growth enhancing tool, adopted by many developing countries, because of its influential role in generating sufficient levels of foreign reserves needed to fund imports and finance investment goods, for present and future capital formation. Therefore, to allow exports to act as an engine for growth in developing countries (i.e., directly contributing to GDP), proper estimation of price and income elasticities is necessary, even though there is some sense of ambiguity on the sizeable characteristic of the price and income elasticities for exports demand that prevails in the developing countries. In addition, export and import demand elasticity parameters also play an important role in the measurement of real exchange rate variation on the trade balance, and is also crucial in deriving the conclusion that the Marshall-Learner1 phenomena proposes. A higher income elasticity of export demand suggests that exports can act an engine of growth, while a higher price elasticity suggests a greater competition for a country's exports at the global scene. Thus, in this situation, a successful real devaluation2 can improve and enhance export earnings.

Some leading empirical works by researchers in estimating export demand equations, have been subjected to misspecification and omitted variable bias-for instance, Senhadji and Montenegro (1999)-because they ignored the powerful influence of Exchange rate (E ) in the relative price variable, which is a significant determinant of the relative price. A number of papers discussed later, estimating exports demand, having omitted E, have defined their relative price variable as ... , where PD is the domestic price of exports and PF is the price level of trading partners, respectively. Therefore, ignoring the exchange rate variable implies that the income and price elasticities obtained render a biased estimate, because it results in the underestimation of price elasticity and the overestimation of income elasticity, thus having serious implications on the proposed trade policies. Rao and Singh (2006) propose the correct specification of relative price variable by incorporating exchange rate with domestic price level (PD ) and foreign price level (PF ).

The purpose of this paper is to empirically estimate the income and price elasticities for the export demand function for three developing countries-Fiji, Papua New Guinea (PNG) and Bangladesh-by using the correct specification, as proposed by Rao and Singh (2006), for the relative price variable. The LSE-Hendry's general to specific (known as GETS) approach is used to estimate the long-run export equations for these countries. …

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