An Analysis of Structural Change in the Demand for Imports and Exports in the Major Industrial Countries.

This study examines the structural stability of disaggregated trade equations for five major industrial countries. Most studies of international trade flows simply estimate import- and export-price elasticities without ever considering whether the underlying models are stable over the sample period. Recent events in the world economy suggest that the assumption of stable import and export functions may be suspect. For manufactured goods, import- and export-supply and demand equations are specified and are estimated simultaneously using two-stage least squares. These estimated equations are then tested for structural stability using the cusum and cusum-of-squares tests. Due to the nature of the products in the fuel and nonmanufacturing sectors, only import-demand and export-supply equations are examined for structural change for these sectors. The countries included in this study are the United States, Canada, Japan, West Germany, and the United Kingdom. Data limitations prevented estimation of the Canadian nonmanufacturing sectors. The specification of the manufacturing model has trade volume as a function of import prices, domestic prices, real income, capacity utilization, and the change in inventory levels. The supply side has the volume of imports as a function of the price of imports times the exchange rate, foreign prices, foreign investment, and foreign capacity utilization. The endogenous variables for the system are the volume of imports, the price of imports, and the exchange rate. The price and activity variables use an Almon lag structure. The export model is similarly defined. The estimation results produced, in a few cases, incorrectly signed elasticities. Since these elasticities were confined to equations for Japan and West Germany, it appears that the establishment of floating exchange rates and the inability of the model to capture the effects of the resultant large revaluations of the yen and the deutschemark are responsible for these incorrect signs. The structural change tests showed that 7 of 20 manufacturing equations evidenced structural change which cannot be explained in the context of the models. Further investigation provided plausible explanations for four of the shifts while the remaining three remain in doubt. These three are the U.S. export-demand , German import-supply, and U.K. import-supply equations. The nonmanufacturing, nonfuel equations were stable for all countries. However, all four of the fuel equations showed a structural change in the 1960's. The U.S. and German equations also evidenced a shift in the late 1970's. The relative lack of structural change in the estimated functions indicates that, for the most part, the import and export-demand and supply equations have been stable over time. However, the presence of equations which have evidence of structural instability suggests that some care should be taken before using these equations for economic analysis.PhDEconomicsUniversity of Michiganhttp://deepblue.lib.umich.edu/bitstream/2027.42/158359/1/8116348.pd