Trade Functions and Capital Movements
Following on from the analysis in the previous chapter we now examine in more detail the import and export functions introduced there. We also say a little more about the way in which capital movements may be treated in an open economy model.
KeywordsInterest Rate Current Account Trade Credit Efficiency Frontier Capital Inflow
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Notes and References
- 1.A fairly wide-ranging selection of empirical evidence is available on the import function. The independent variables usually include, in one form or another, relative prices and terms of sale, the level of domestic income and/or the internal pressure of demand and a time trend. Some pieces of research take a broad look at the determination of imports as a whole, whilst others concentrate on the determination of one specific category or type of import.Google Scholar
- Some empirical work, instead of taking actual imports as the dependent variable, takes the import share. The selection of import share allows attention to be focused on the determinants of import share, such as relative prices and capacity utilisation. Although estimations using import share carry with them certain underlying assumptions, for instance, that there are identical income elasticities of demand for both home and foreign produced goods, the main advantage of using it is that the problem of multicollinearity is reduced.Google Scholar
- A major problem involved with empirical estimation of the import function is that the independent variables may not be directly observable. We are, therefore, forced to look for suitable proxies. Some determining variables may simply not be suited to quantitative estimation at all. It is, for example, ex ante waiting time which is of significance, and this has been variously estimated from delivery lag, inventory level and capacity utilisation data. Actual waiting time may be a less satisfactory proxy since it may be far removed from the quoted waiting time and may fail to reflect the producers’ willingness to seek and accept new orders which will influence the supply of imports. It is very difficult, however, to derive any series at all that represents clearly the enthusiasm with which suppliers pursue the sale. Lags are also likely to be significant in attempting to explain import performance, though the precise structure of these may be difficult to ascertain.Google Scholar
- Different empirical studies have come up with different results, some have found relatively high price elasticities whereas others have found relatively low ones. In many studies the internal pressure of demand appears to be important, not least because it affects aspects of non-price competitiveness. Furthermore, there is some empirical support for a cyclical ratchet effect.Google Scholar
- 2.Empirical studies of the export function tend to have adopted a disaggregated approach. Such an approach may be viewed as being substantially legitimate since different industries exhibit different market structures and technologies, as well as different elasticities of demand and supply, both long run and short run.Google Scholar
- No clear conclusions emerge from the empirical evidence. Price variables get a mixed reception, while perhaps the majority of studies find that exports are negatively related to domestic demand pressure, although the evidence is by no means unanimous.Google Scholar
- 3.Almost all good introductory texts in macroeconomics contain an analysis of investment and of the capital stock adjustment principle. Interested readers should refer to one of these.Google Scholar
- 4.Again analyses of the demand for money are available in most introductory texts.Google Scholar