Trade and Economic Development - Estimating Price and Income Elasticity on the World Market

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The balance-of-payments-constrained growth theory has emerged as perhaps the most interesting objection to the doctrine of unregulated free trade within the field of development economics. It stipulates that growth is constrained by demand, particularly demand for exports because exports are the only source for foreign currency (assuming balanced current account in the long run) and thus crucial to the acquisition of capital goods scarce in much of the developing world. Specifically, economic growth is thought to be dependent on the growth of world income as well as the price and income elasticity of demand for exports and imports. Implicit the argument is made that countries exporting refined goods benefit more from unregulated trade than do countries exporting unrefined goods, due to the different demand properties of refined and unrefined goods. This paper sets out to test the validity of this claim by measuring income and price elasticity of a collection of important export goods for a sample of developed and developing countries. Some evidence is found to support the theory. Nevertheless, statistically significant estimates for price and income elasticity can be found for only a minority of the good...