THE SPECIFICATION OF THE FOREIGN TRADE MULTIPLIER FOR A DEVELOPING COUNTRY*

Publication Date01 August 1981
DOIhttp://doi.org/10.1111/j.1468-0084.1981.mp43003004.x
AuthorAsrat Tsegaye
Date01 August 1981
THE SPECIFICATION OF THE FOREIGN TRADE
MULTIPLIER FOR A DEVELOPING COUNTRY*
Asrat Tsegaye
I. INTRODUCTION
One of the most important constraints on the growth of economies
is the balance of foreign trade. It is important especially in a less
developed country to know how the import bill is affected by changes
in the economic structure of the country over time. This paper is
concerned with one aspect of the relation between economic structure
and imports, namely how the foreign trade multiplier is estimated. lt
examines empirically the relative merits of the 'inputoutput' formula-
tion of the foreign trade multiplier and the traditional formulation
of the foreign trade multiplier.1 In particular it looks at the argument
that the 'inputoutput' formulation is most appropriate in a less de-
veloped country where the economy is more open and the import
coefficients related to different types of expenditure, such as con-
sumption, investment and exports, are likely to differ in value. This
hypothesis is tested by estimating import coefficients for fourteen
less developed countries (LDCs) and five developed countries (DC5).
The rest of this paper is divided into four sections. Section II derives
the foreign trade multipliers based on the traditional approach and
the 'input-output' approach while Section III discusses the method-
ology of estimation of import coefficients. Section IV covers the
empirical evidence on the foreign trade multiplier. In this section
the estimated import coefficients and the calculated multiplier values
on the basis of the two multiplier formulations are examined to see
whether the differences in estimates of import coefficients and the
differences between the various income multipliers are significant.
The conclusion reached is set forth in Section V.
*1 am very grateful to A. P. Thirlwall and R. Disney for helpful comments.
'See Kennedy, C. and Thiriwall, A. P. (1978), 'The Foreign Trade Multiplier Revisited'
in Currie, D. and Peters, W., Proceedings of the A. U T.E. Conference, Croom Helm; Kennedy, C.
and Thirlwall, A. P. (1979), 'The Input-Output Formulation of the Foreign Trade Multiplier',
Australian Economic Papers, June; see also Thirlwall, A. P. (1980), Balance of Payments
Theory and the United Kingdom Experience, London, Macmillan, Ch. 2.
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