Foreign Trade, Devaluation and Elasticities: A Model Approach. prof. Ing. Jaroslav Husar, CSc. Mgr. ek. University of Economics, Bratislava

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1 Forign Trad, Dvaluation and Elaticiti: A Modl Approach prof. Ing. Jarolav Huar, CSc. Mgr.. Univrity of Econoic, Bratilava Introduction Fro th thory of th intrnational conoic it i nowwn that th pnditur-witching polici priarily wor by changing rlativ pric. Th ain for of uch a policy i a chang in chang rat. i.. a dvaluation or a rvaluation of th dotic currncy. Dirct control can alo b claifid undr thi hading and ar uually applid to rtrict iport. Conur will thn try to buy dotic good intad of iportd good, and hnc dirct control can b viwd a a witching dvic. W hall, howvr, concntrat on a dicuion of dvaluation (Slovaia ha princd it in 993 to how how iportant i th thory to indicat th dird conoic policy. Trad balanc and th dvaluation: th odl Th traditional approach to th ffct of dvaluation on th balanc of trad run in tr of laticiti (Bo Sodrtn. Th cor of th traditional approach i containd in o-calld Marhall-Lrnr condition, which tat that th u of laticiti of dand for a country' port and of it dand for iport ha to b gratr than unity for a dvaluation to hav a poitiv ffct on a country' trad balanc (A.. Lrnr. If th u of th laticiti i allr than ubity, a country can intad iprov it balanc of trad by rvaluation. Bo Sodrtn howd u that if w want to pr thi condition in tr of forula, it can b t out a follow: db = X f ( (

2 Forign Trad, Dvaluation and Elaticiti: A Modl Approach 75 whr db i th chang in th trad balanc, th dvaluation in prcntag, X f th valu of port prd in forign currncy, th dvaluing country' dand laticity for iport (firt country in th nt tt, raon for, and th cond country' (ay th rt of th world dand lticity for port fro th dvaluing country (Slovaia. It i ay to fro th prion ( that th u of th two critical laticiti ha to b largr than unity for th trad balanc to iprov bcau of a dvaluation. If th u i l than unity, an apprciation hould intad b ud to cur a dficit in th trad balanc. W in Slovaia hav princd that th dvaluation lad to an incra in th pric of iport. What th ffct of thi pric incra will b dpnd on th laticity of dand for iport. Th largr it i, th gratr will b th fall in th volu of iport. Th valu of th dand laticity of iport dpnd, of cour, on what typ of good th dvaluing country iport. If a country priarily iport nciti, raw atrial and good ndd a input for it indutri (Slovaia i a typical country, th dand laticity of iport ay b vry low, and a dvaluation ay not b a vry fficint an of corrcting dficit. W want to ntion that th Marhall-Lrnr condition t out in forula ( i built on o trict iplification. It au, roughly, that th upply laticiti ar larg and that th trad balanc i in quilibriu whn dvaluation ta plac. Lt u tart by tting out th following quation for th trad balanc: B f = = X f M f ( whr B f dnot th dvaluing country' trad balanc in forign currncy, whr and ar dvaluing country' volu of port and iport, rpctivly; and ar th pric of iport and port in cond country (rt of th world; and X f and M f ar th valu of port and iport in country on (dvaluing, both dnotd in forign currncy. Nt w nd to gt i th diffrntiating of quation (. Diffrntiating giv Th principl of thi approach wa firt dvlopd by S.S. Alandr

3 Forign Trad, Dvaluation and Elaticiti: A Modl Approach 76 db f = d - d - d d d = d d d X f M f (3 Now w dfin th four laticiti: d =, th laticity of ho port upply (4 d d =, th laticity of forign dand for port (5 d d =, th laticity of forign upply of iport (6 d d =, th laticity of ho dand for iport (7 d W obrv fro th way in which th four laticiti hav bn dfind that that thy will all b poitiv barring Giffn good. Th thory au that w hav pric qualization btwn th two countri - pctd ca in art conoi - through th chang rat, r, o that w gt = r (8 Diffrntiaiting quation (8 totally and adding in quation (8 giv d = r dr

4 Forign Trad, Dvaluation and Elaticiti: A Modl Approach 77 = ( d r ( d r (9 = ( d r( In quation (9 w hav introducd th dvaluation cofficint, which how th rlativ chang in th chang rat. W can dfin in th following way: = d dr r dr = r d dr r d dr (0 r Fro quation (9 w can gt d d = ( ( In a copltly analogou way w dduc that d d = ( ( Th rlativ chang in volu and pric can now b prd in tr of laticiti and th dvaluation cofficint. Uing quation (5 and ( w gt d d d = = ( (3 But d / = (d /. By ubtitution w gt

5 Forign Trad, Dvaluation and Elaticiti: A Modl Approach 78 ( d d = Fro thi follow ( ( / ( d = = (4 In an analogou way w can driv ( d = (5 ( d = (6 ( d = (7 Now uing th lat four prion w gt th ffct of a dvaluation on th trad balanc: = ( ( ( ( M X db f f f (8 What do th (8 ay? Eprion (8 how that th ffct of th dvaluation ar owhat or coplicatd than hown in quation (; i.. if w do not au that upply laticiti ar infinitly larg th ituation bco owhat or copl. If, to ta an tr apl, w aud that th upply laticiti wr qual to zro thr would b no iprovnt in th trad balanc bcau of incraing port but o iprovnt bcau of fall in dand for iport.

6 Forign Trad, Dvaluation and Elaticiti: A Modl Approach 79 Gnrally paing, w can ay that if th laticiti ar largr than unity, thn th largr thy ar, both on th upply id and th dand id, th largr will b th iprovnt in trad balanc. Sindy Alandr howd th way to arriv at forula ( fro (8. It i a follow: if upply laticiti tnd to infinity, thn ( / ( If, furthor, i all, w gt ( [ (/ ] / But if i all and if w au that trad i balancd bfor th dvaluation, w gt db f = M f ( ( W hav now t out th ain part of th laticity approach to dvaluation. Th dubiou apct of thi approach i that it i built on a parital typ of thorizing and that it do not ta into account conidration of gnral quilibriu. Concluion Dand and upply laticiti ar convntionally dfind ctri paribu, i.. othr pric and inco ar uppod to b contant, but in dvaluation pric and inco will crtainly chang. Thrfor, th u of partial laticiti in connction with dvaluation can aily b ilading. What on would li to now i th valu of th "total" laticiti, i.. th valu of an laticity whn all th factor involvd in th dvaluation chang. Such a total laticity aur how quantiti ar affctd by pric chang whn vrything lily to chang ha

7 Forign Trad, Dvaluation and Elaticiti: A Modl Approach 80 don o. Thi i, howvr, not an oprational concpt, a it will nvr b poibl to now in advanc th valu of uch laticiti. Th rult of dvaluation dpnd not only on partial laticiti but alo on th aggrgat bhavior of th conoic yt. In th litratur i nown an altrnativ approach to th ffct of dvaluation in acro tr. It i nown a th aborption approach. Litratur. Bauol B. W. and Blindr A.S: Econoic, Harcourt Brac J. Nw Yor, 994. Huar J.: Maroonoia, Kartprint, Bratilava Sondrn Bo: Intrnational Econoic, Macillan, London, 980 Jarolav Huár Dpartnt of Opration Rarch and Econotric, Univrity of Econoic Dolnozá /b Bratilava, Slova Rpublic

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