An empirical evaluation of export demand in China
| Published date | 19 June 2009 |
| DOI | https://doi.org/10.1108/17544400910966077 |
| Pages | 100-109 |
| Date | 19 June 2009 |
| Author | Saten Kumar |
| Subject Matter | Economics |
JCEFTS
2,2
100
Journal of Chinese Economic and
Foreign Trade Studies
Vol. 2 No. 2, 2009
pp. 100-109
#Emerald Group Publishing Limited
1754-4408
DOI 10.1108/17544400910966077
An empirical evaluation of
export demand in China
Saten Kumar
Auckland International College, Auckland, New Zealand
Abstract
Purpose – The purpose of this paper is to estimate the export demand equation for China with
appropriate specification that incorporates exchange rate in the relative price variable.
Design/methodology/approach – Alternative time series techniques such as general to specific
and Johansen maximum likelihood are used with annual data from 1974-2004. The augmented
Dicky–Fuller and Elliot–Rothenberg–Stock methods are also employed to test the time series
properties of the variables.
Findings – The paper confirms that there is a cointegration relationship between real exports, real
income and relative pricesin China. The long-run income elasticity is around 1.3 and therelative price
elasticity is around 1.5. In addition, the export demand functions are temporally stable in China.
Research limitations/implications – Thestructural breaks and trade shock analysis were ignored
because that would have made this paper much longer.
Practical implications – The results imply that exports are an engine of growth in China. China’s
exports are competitive in the international market and it has the option to devalue its currency to
promote export earnings. However, the paper argues that in current global economic crises, trade
promotion policies such as subsidies, tax exceptions and special credit lines should be encouraged.
Originality/value – The paper assesses themagnitudes of export elasticities witha specification that
includes exchange rate in relative price variable.
Keywords China, Exports, Exchange rates, Prices
Paper type Research paper
1. Introduction
The objective of this paper is to examine the equilibrium long-run income and relative
price elasticities of export demand in China . The export demand is one of the heavily
researched topics in macroeconomics because the income and relative price elastic ities
has implications for export g rowth policies. Exports play an impor tant role in
generating the foreign exchange necessary to finance imp orts and investment. It is well
known that the higher the income elasticity of exports, the more powerful expor tswill
be as an engine of growth; however, it is also important to note that to increase income
from exports it is necessary to implement a good price elasticity on the cost of expor ts,
resulting in a more competitive offering in the world market. In such cases, real
devaluation would be effective in generating foreign exchange earnings. Trade
elasticities are important parameters in the evaluation of real exchange rate
fluctuations on the trade balance.
The elasticities of exports and imports are vital to determine whether the Marshall–
Lerner condition hold for China. The Marshall–Lerner condition is satisfied when the
sum of exports and imports price elasticities are greater than one. In such a case, the
depreciation of the home currency will improve the trade balance of this country.
However,we argue that shock analysis should be conducted to confirm that depreciation
of the currency by the real effective exchange rate will improve the trade balance.
A comprehensivediscussion on trade shocksin China can found in Fan et al. (2004).
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1754-4408.htm
The author would like to thank B.B. Rao, Billy Manoka, Rup Singh for useful comments on this
paper. However, errors are his own responsibility.
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