Growth, Expansion of Markets, and Income Elasticities in World Trade

Author/Editor:

Yi Wu

Publication Date:

January 1, 2005

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

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 its current account and/or depreciation of its real exchange rate. Krugman (1989) first documented the existence of a “45-degree rule” under which relative income elasticities are systematically related to relative growth rates. In this paper, we develop and test an intertemporal current account model in which Krugman’s original 45-degree rule is a special case. The result suggests that secular trends in current accounts and/or real exchange rates are much smaller than one would have projected based on conventional income elasticities.

Series:

Working Paper No. 2005/011

Subject:

Consumption Exports Imports Personal income Price elasticity

English

Publication Date:

January 1, 2005

ISBN/ISSN:

9781451860306/1018-5941

Stock No:

WPIEA2005011

Pages:

33

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