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Growth, Expansion of Markets, and Income Elasticities in World Trade
Author(s) -
Wu Yi
Publication year - 2008
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/j.1467-9396.2008.00770.x
Subject(s) - economics , depreciation (economics) , consumption (sociology) , terms of trade , econometrics , exchange rate , macroeconomics , microeconomics , profit (economics) , social science , sociology , financial capital , capital formation
The Houthakker–Magee effect implies that a country facing unfavorable income elasticities in trade must either grow at a slower rate than its trading partners or experience a trend worsening of the current account and/or depreciation of the real exchange rate. Krugman (1989) first documented the existence of a “45‐degree rule” under which income elasticities are systematically related to growth rates. I develop a model which is a generalization of Krugman (1989) in several dimensions (including intertemporal). The intertemporal assumption of equal consumption growth for individuals across countries and the assumption of no intertemporal trade can be viewed as two extreme benchmarks. Empirical tests of the various 45‐degree rules suggest that it is misleading to treat income elasticities as structural, as is commonly done in forecasts of current account movements. The data also seem to be more consistent with the benchmark of no intertemporal trade than that of complete intertemporal trade.