Bayoumi, Tamin, 1996, “International Trade and Real Exchange Rates,” in Exchange Rate Movements and their impact on Trade and Investment in the APEC Region, ed. by Takatoshi Ito, Peter Isard, Steven Symansky, and Tamin Bayoumi, 1996, IMF Occasional Paper, No. 145 (Washington: International Monetary Fund), pp 29–46.
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)| false Bayoumi, Tamin, 1996, “ International Trade and Real Exchange Rates,” in Exchange Rate Movements and their impact on Trade and Investment in the APEC Region, ed. by 1996, IMF Occasional Paper, No. 145 ( Takatoshi Ito, Peter Isard, Steven Symansky, and Tamin Bayoumi, Washington: International Monetary Fund), pp 29– 46.
Bayoumi, Tamin, 1999, “Estimating Trade Equations from Aggregate Bilateral Data,” IMF Working Paper No. 99/74 (Washington, D.C.: International Monetary Fund).
Coe, David T., and Se-Jik Kim, eds. 2002, Korean Crisis and Recovery (Washington: International Monetary Fund, and Seoul: Korea Institute for International Economic Policy)
Diewert, Erwin W., and Catherine J. Morrison, 1986, “Export Supply and Import Demand Functions: A Production Theory Approach,” NBER Working Paper No. 2011 (Cambridge, Massachusetts: National Bureau of Economic Research).
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Krugman, Paul R., 1989, “Differences in Income Elasticities and Trends in Real Exchange Rates,” European Economic Reviews, Vol. 33, pp 1031–54.
Lawrence, Denis, 1990, “An Adjustment-Cost Model of Export Supply and Import Demand,” Journal of Econometrics, Vol. 46, pp 381–98.
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I am particularly indebted to David T. Coe and Joshua Felman for their guidance and support, without which this paper could not have been written. I would also like to thank Craig Beaumont, Rishi Goyal, Dong He, Martin Schindler, Kevin Tsui, Kenichi Ueda, and Harm Zebregs for valuable comments.
For a comprehensive review of Korea’s experience of crisis and recovery in the late 1990s, see Coe and Kim, eds. (2002).
Given that Korea’s economic development has slowed, the decline in the income elasticity is consistent with the “45 degree rule” of Krugman (1989), which asserts that fast-growing countries face high income elasticities of demand for their exports, while the opposite is true for slow-growing countries.
The slow decline in the economies of Korea’s trading partners is mainly due to the increasing share of exports to China, which have been growing rapidly in the 1990s. Other than China, Korea’s main trading partners, particularly Japan, grew more slowly in the 1990s than before.
Results of these tests are available from the author on request.
Following the convention in the literature, this paper refers to the coefficients of the cointegrating variables in level as “long-run coefficients” and those from the regressions on the rate of change of the variables as “short-run coefficients.”
To ensure robustness, other methods are used to confirm the results. Estimates using other methods are available from the author.
While some papers have estimated a simultaneous system of demand and supply equations for Korea, these papers yield estimates largely similar to those obtained from the single demand equation approach. Moreover, Giorgianni and Milesi-Ferretti (1997), using the system of equations approach, found a lack of strong simultaneity between export demand and supply shocks and that the estimated supply curve is almost perfectly elastic. In light of these, the “standard equation” refers to a single demand equation as used in most empirical work.
Throughout this paper, uppercase letters denote level of variables whereas lowercase letters denote their logarithm.
This formula follows the procedure used by the IMF Information Notice System to calculate the real effective exchange rates. An advantage of using this formula is that it greatly simplifies the calculation of Pw, which can be conveniently computed given Korea’s real effective exchange rate, the Korean CPI, and the exchange rate of Korean won vis-à-vis the dollar.
For example, Giorgianni and Milesi-Ferretti (1997) find a long-run income elasticity of 3.2 using data for 1970–99. Bayoumi (1996), using data for 1970–95, finds a long-run income elasticity of 3.1 and a long-run price elasticity of -0.5. For a comparison with estimates for other countries, see Table 7.
An example is Krugman (1989). Numerous empirical papers have explained exports by export supply equations for other countries. See, for example, Halpern and Szekely (1992) and Diewert and Morrison(1986).
This assumption is made mainly to enhance technical simplicity. In reality, each firm may have some market power so that it has an incentive to invest and innovate.
The assumption of external increasing returns to scale is crucial to the assumption of the price taking behavior. If increasing return to scale is internal to a firm, then the firm has an incentive to expand until its production capacity reaches constant returns to scale or decreasing returns to scale, resulting in imperfect competition. One way in which increasing returns to scale and perfect competition can coexist is by assuming that the former is external to the firm. For more detail, see Marshall’s classic, “Principles of Economics.” Modern economists Helpman and Krugman (1996) also have an excellent exposition on this point in Chapter 3 of their book.
The appendix will derive results for a general functional form.
The marginal cost confronting each firm j is
As the positive spillovers may be intra-industrial or inter-industrial, the potential GDP is used. Since the total factor productivity and the potential output of the economy may be correlated, collinearity may arise; nevertheless, the estimates will still remain unbiased and consistent.
This implies that the production of non-EEPs may exhibit constant returns to scale. Therefore, the assumption of a perfectly elastic supply curve in the standard model may be appropriate.
For example, Giorgianni and Milesi-Ferretti (1997), using earlier data obtain an income elasticity of 1.2 and a price elasticity of -1.1. Also, Bayoumi (1996), using earlier data, obtains an income elasticity of 1.4 and a price elasticity of 0.6. For a comparison with estimates for other countries, see Table 7.
Formally, the demand function for capital goods is derived by solving the producer’s cost minimization problem subject to a production target.
A distinguishing feature of this model is that different scale variables and different price variables are incorporated in the equation simultaneously. In most empirical models on import equations, only one scale variable and one price variable are included. For example, although Giorgianni and Milesi-Ferretti (1997) experiment the use of different scale and price variables in the import equation, they do not include all of them simultaneously.
Total capital formation does not perform well in the estimation.
Given the aggregate output, X, the marginal cost confronting firm j, MC (Xj), is equal to ξ(X)ϕ′(Xj). The elasticity of the marginal cost with respect to an additional output of Xj,