MICHAEL C. DEPPLER and DUNCAN M. RIPLEY
This paper presents a simple model of world merchandise trade disaggregated by commodity class and by country or country grouping. The model is part of a larger model encompassing all current account transactions. It is designed principally to estimate the responsiveness of merchandise trade to variations in income and activity levels in the industrial countries. The responsiveness of trade flows to variations in prices is also considered, but the empirical results on price sensitivity appear to be less reliable.
The trade flows were disaggregated into four commodity classes: foods, raw materials, fuels, and manufactures. Disaggregation is desirable in that the determinants of import demand vary depending on the type of import. For example, many manufactured imports enter directly into final demand, whereas raw material imports are almost exclusively intermediate inputs in the production process. Similarly, the demand for manufactures is likely to be more price sensitive than is the demand for fuels or raw materials. Further, institutional factors tend to play a larger role in the determination of agricultural flows than in the determination of many other merchandise flows. Thus, it would be unrealistic to specify a single import-demand relationship that necessarily assumed a uniform pattern of demand determination across commodity classes. The benefits arising from disaggregation, however, must be weighed against the loss in manageability that necessarily accompanies this disaggregation. In view of this trade-off, the commodity detail was limited to the four groups mentioned.
The model is a closed model in that all countries are covered either individually, as for the 14 industrial countries, or within one of four country groupings. However, since the principal explanatory variables are activity and income variables in the industrial countries, interest centers on the equations for these countries; the equations for the country groups are included for completeness. Attention is focused principally on trade in manufactures and on imports of raw materials and fuels, since these flows are particularly important for the trade balances of the industrial countries.
It is expected that the model will be used for both simulation and forecasting. The presentation here concentrates on the basic relationships in the model, discussing only briefly supplementary links that are needed to make it fully functional in either of these two modes. Its usefulness in terms of simulation is expected to lie in the calculation of countries’ trade balances under alternative assumptions about economic activity levels in the industrial countries. The model is also expected to be useful in projecting countries’ trade balances for 6 to 18 months ahead, thus providing an input to the semiannual forecasting exercise of the International Monetary Fund. However, when the model is used for this purpose, it will be necessary to make liberal use of forecasts and expert information provided by country and commodity specialists in the Fund, not only for the exogenous variables in the model—for example, spot commodity prices and various components of gross national product (GNP)—but also for a number of variables that are endogenous to the model, especially variables relating to particular commodity flows—for example, agricultural trade—or to country groupings.
This merchandise model contrasts sharply with the trade model of Project LINK in that it is not integrated with explicit national models. 1 This is a disadvantage in that some of the interdependence between the foreign and domestic sectors may not be systematically taken into account; it is an advantage in that it is possible to impose a consistent specification across countries, and in that the maintenance and use of the model are greatly facilitated. 2
The present model is quite similar to the trade model of the Organization for Economic Cooperation and Development (OECD) in basic construction.3 Total domestic demand is the dominant exogenous variable in the OECD model, and final domestic demand for manufactures is the dominant exogenous variable in this model. Both models treat domestic price levels and exchange rates as exogenous, and are specified to be semiannual to conform to the time frequency used in forecasting exercises. However, the model described here differs from the OECD model in a number of respects. The OECD model has no commodity breakdown, whereas this model distinguishes among four commodity classes. The OECD model has individual equations for 18 OECD members, composite equations for “other OECD” members, and closing equations for the rest of the world; this model covers the 14 major industrial countries, and the rest of the world is disaggregated into four regions.