Quantitative International Economics

Edward E. Leamer, Robert M. Stern

• Publisher: Routledge
• Year: 2017
• Print ISBN: 9780202308715
• eBook ISBN: 9781351495219
• Topic: Business
• Subtopic: International Business
• Index: Business

This distinctive book sets forth, on an advanced level, various methods for the quantitative measurement of important relationships at issue in areas of the balance of payments and international trade and welfare. The results achieved in recent studies are presented and the directions for new research are indicated. This book is composed of two main parts.Part I deals with the balance of payments and consists of the first half of the book. One of the longest and almost important chapters of this part talks about, at length the time-series analysis of the demand for imports and exports from the point of view of an individual country. This subject has a long and somewhat checkered history dating from the 1940's, when a number of estimates using least squares multiple regression methods were made of import and export demand functions for the interwar period. The noteworthy feature of many of these estimates was that they suggested relatively low price elasticities of demand in international trade. The implication was thus drawn that the international price mechanism could not be relied on for balance-of payments adjustment purposes.This book talks about the topics of theory and measurement of the elasticity of substitution in international trade, estimating the international capital movements, and forecasting and policy analysis with econometric models. Part II deals with international trade and welfare. While, there are many other books dealing with trade theory, this title focuses on a narrower range of topics that are not always mentioned or understood by individuals, such as the theory and measurement of trade dependence and interdependence, the analysis of the component factors a country has that affects how its export growth is over time, and the welfare effects of trade liberalizationThis book serves as a guide and reference work for economics graduate students, academicians, and practicing economists in private and governmental circles. They will find this book

1

Introduction

Our concern in this book is with the quantitative measurement of international economic relationships. The relationships we discuss were selected in terms of their theoretical importance and policy relevance in the areas of international finance and trade. We follow the procedure of beginning each chapter with a discussion of the theoretical rationale underlying the particular relationship. We then treat measurement considerations, drawing in this regard upon some of the most noteworthy studies published in recent years. We try insofar as possible to offer concrete suggestions on research methodology and to point out the directions in which we think future research might profitably go.

Part I dealing with the balance of payments consists of Chapters 2, 3, 4 and 5. The longest of these by far is Chapter 2, in which we treat at length the time-series analysis of the demand for imports and exports from the point of view of an individual country. This subject has a long and somewhat checkered history dating from the 1940’s, when a number of estimates using least squares multiple regression methods were made of import and export demand functions for the interwar period. The noteworthy feature of many of these estimates was that they suggested relatively low price elasticities of demand in international trade. The implication was thus drawn that the international price mechanism could not be relied on for balance-of-payments adjustment purposes.

However, this implication was shown by Orcutt in his pathbreaking 1950 article not to be altogether valid since there were tendencies for the regression methods and statistical specifications employed to bias the measured elasticities downward towards zero. In the years following Orcutt’s work, there was great hesitation in using traditional least squares regression in the time-series analysis of demand. This situation has since been altered by further theoretical inquiry into the statistical issues raised by Orcutt. It is now believed that Orcutt’s arguments were not so conclusive and general as they first appeared to be. In addition, as more data points became available for the post-World War II period, a number of studies using least squares regression were made of import and export demand functions with results that seemed quite plausible in view of a priori theoretical considerations concerning price elasticities. It seems therefore that while there were special characteristics in the interwar period that made this period unconducive to the use of least squares analysis, these characteristics are much less important today.

Our object in Chapter 2 is thus to discuss at some length the most important points that an investigation using least squares analysis should be concerned with in estimating import and export demand functions. Considerable evidence has already accumulated regarding the demand factors that determine the international flow of goods, thereby providing information useful to policymakers concerned with the balance of payments. However, further improvements are possible.

Chapter 3, dealing with the measurement of the elasticity of substitution in international trade, represents a bit of a digression. This is justified in our judgment by the amount of effort in the past that has gone into such measurement. Much of this effort was motivated by a search for alternative specifications that would yield more reliable and larger price elasticities than those obtained in estimating demand functions directly. However, given our increased understanding of statistical and data problems and the fact that the elasticity of substitution in international trade lacks a clear theoretical rationale, we take the position that there may be a greater payoff in direct estimation of the demand functions in question. It may be nevertheless that measurement of the elasticity of substitution is useful in models of relative export performance that embody both price and nonprice factors.

The measurement of factors determining international capital movements is treated in Chapter 4. This poses more difficult problems than trade in real goods and services especially because of the greater importance of expectational variables and the impingement of institutional practices and constraints. Moreover, some of the first works on capital movements in the early 1960’s were limited by an inadequate theoretical framework, which resulted in improper selections of variables. The fact that the confusion over the appropriate variables has lasted as long as it has is attributable to a premature preoccupation with statistical problems of secondary importance. Much remains then to be done as far as the empirical examination of the capital account of the balance of payments is concerned.

In Chapter 5, we attempt to bring the current and capital account relationships to bear on the problems of forecasting and policy analysis of the balance of payments. While this is a burgeoning subject, due especially to the great advances that have been made in computer technology, we are nevertheless still at a stage where there are somewhat divergent views on exactly what should go into the construction of econometric models and the uses to which these models should be put in forecasting and policy analysis. Much of our discussion in this chapter is therefore somewhat tentative and suggestive. We have reviewed the treatment of the foreign sector in some of the existing econometric models of the United States economy. Since this treatment is quite simple at the present time, there remains much to be done, at least in the United States, to integrate the domestic and foreign sectors into a comprehensive model capable of yielding reasonably accurate forecasts and serving as the basis for analyzing alternative economic policies.

Part II dealing with international trade and welfare consists of Chapters 6, 7 and 8. There is of course a large body of empirical literature dealing with the different aspects of trade theory. In general, much of this literature is aimed at particular implications of the theory, such as comparative advantage, the validity of the factor endowments model of international trade, and, more recently, the explanation of trade according to the “product-cycle” and “technological-gap” hypotheses. Since most of these studies have not raised important questions of conceptual design and statistical methodology and since they have been in large measure reviewed at length elsewhere, we have chosen to restrict ourselves to a narrower range of topics that appeared to us important and not always well understood. Perhaps at some later time we may expand our scope to include the other topics mentioned.

In Chapter 6 we are concerned with providing a general equilibrium framework into which can be fitted the analysis of factors determining the size of a country’s foreign sector and the flows of goods between pairs of countries. Of all the topics treated in the various chapters, the material in Chapter 6 is perhaps the most unfamiliar, at least to American readers, since the bulk of the work involved has been carried on in continental Europe.

The lack of an explicit theoretical framework has been the greatest failure of these studies. Without such a theory the analysis tends to degenerate into a search for meaningless empirical regularities. It thus is quite important to bring international trade theory to bear upon the role the variables may play and thereby provide some rationale for the otherwise ad hoc empirical impressions that such studies convey.

The material contained in Chapter 7 has grown out of a concern for analyzing the component factors that affect a country’s export growth over time. The basis for the analysis is the assumption that a country’s share in world markets should be constant over time. The application of an identity based on the constant-share norm highlights the importance to a country of concentrating its exports in high-growth commodities and markets and indicates whether the country has been successful in competing with other sources of supply during the period in question.

Chapter 8 deals with estimating the welfare effects of trade liberalization. This analysis is relevant for analyzing the consequences for economic welfare of unilateral and multilateral tariff changes from the standpoint of individual countries. It can also be applied to cases of preferential tariff changes in the context of customs unions and trade preferences of various kinds. Most of the discussion of this chapter is concerned with the theoretical derivation of the compensated demand curve, which serves as the conceptual basis for analyzing the welfare effects of tariff changes in terms of consumer surplus. The price elasticities required for the actual calculations can in principle be obtained by using the procedures described in Chapter 2, although in practice “guesstimates” of the relevant elasticities are usually employed. The assumptions underlying the compensated demand curve are shown to be rather restrictive. However, the changes involved in trade liberalization are usually relatively small so that the calculation of the welfare effects may provide a reasonable assessment of the order of magnitude of these effects.

Rather than list all the bibliographic items together, we have chosen instead to list them separately with each chapter. These bibliographies contain the most important works of about the past decade, but they are by no means exhaustive.

PART I

The Balance of Payments

2

Time-Series Estimation of Import and Export Demand Relationships

In the present chapter we shall discuss the application of traditional multivariate least squares regression methods to the analysis of import and export time series. Our object is not to review regression methods in detail, since there are many standard books on the subject.¹ Rather, our primary concern will be to bring together the many questions with which a researcher must cope in planning his own work and in evaluating the work of others.

The foundation of the statistical research to be discussed in this chapter is a hypothesized behavioral relationship on the demand side between the level of imports (exports) of goods and services and several explanatory variables.² This relationship is assumed to have held consistently throughout the data period. When forecasting is performed, the relationship is extended by assumption into the future as well.

The central problem at issue is the specification of the import (export) demand relationship in a form suitable for statistical fitting. In this regard, we will be concerned with selection of appropriate dependent and independent variables, choice of functional form, and method for handling response lags. We shall also discuss certain special problems of estimation that may be relevant for particular countries and classes of goods, and appropriate formats for the presentation of results.

Some readers may be disturbed by the multitude of questions that will be posed in our discussion in comparison with the sparseness of definite answers. If this is indeed the case, we will have succeeded in our purpose, for it is far too common for the important questions to be glossed over and for research decisions to be fallen into rather than arrived at by explicit design. The fact that we shall concentrate mainly on statistical questions should not be interpreted to mean that knowledge of the institutions and the economic characteristics of the markets to be analyzed is unimportant. This surel...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• List of Figures and Tables
• Preface
• Chapter 1 Introduction
• PART I THE BALANCE OF PAYMENTS
• PART II INTERNATIONAL TRADE AND WELFARE
• Index