Price and Income Elasticities of Export and Import and Economic Growth in the case of the Republic of Macedonia

Abstract

The purpose of this empirical research is estimation of the long-term price and income trade elasticities and their practical application in Thirlwall's economic growth model in the case of the Republic of Macedonia. The estimation is based on ARDL modeling, as one of the most used procedures for testing the cointegrating relationship between variables. The results confirm the existence of long-term relationship between export and import demand and relative prices and income. There is an evidence for high import elasticity on domestic income changes and relatively significant export elasticity to changes in the world income. The estimated price elasticities are lower, with the imports being more sensitive on price variations than the exports. In other words, domestic economic agents are more sensitive to price changes than foreigners are. The higher income elasticity of import than the income elasticity of export points out the trade balance deterioration. Practical application of the estimated income elasticity of import in the Thirlwall's economic growth model shows that the growth rate of the Macedonian economy is determined largely by balance of payment constrains, or it depends on export growth rate and significantly is reduced by high income elasticity of import