CARIFORUM and UK EPA Study

Dependent variable: LOG(EXP01)

Excluded

Chi-sq

df

Prob.

LOG(AVGTRD)

2.214836 0.087262 3.290699 1.045534 0.430252 0.556198 8.073026 2.532512

2 2 2 2 2 2 2 2

0.3304 0.9573 0.1929 0.5929 0.8064 0.7572 0.0177 0.2819

LOG(EXR)

GDPG

INFL

INT

LOG(K)

LFG

LOG(OP)

All

20.25163

16

0.2091

We maintain the theoretical value of elasticity for theoretical and econometric simplicity but propose a modification of the specification and covariates to include openness and a broader measure of inflation, the GDP deflator, which captures the effects of price movement on consumption and production. We therefore propose an export function with the highly pertinent covariates: (3) where ψt is for the GDP deflator (the ratio of nominal to real GDP), ξt is for the real exchange rate and Ot is an openness indicator. While the real exchange rate adjusts for inflation or purchasing power of goods and services, trade flows are significantly contingent on openness. Trade restrictions of assorted forms pose impediments to flow of goods, services, and financial assets. Accordingly, we hope to incorporate changes in exchange rates and openness as far as data would permit. We prefer to adopt the relative share of a country’s trade to the volume of trade with the similarly situated sampled countries (Warburton, 2012b) as a measure of openness. This measure is presented in contradistinction to trade share (TS), which measures the volume of trade to a nation’s GDP per capita. The trade share is known to be deficient because it produces inconsistent estimates and encourages high probabilities of miscalculation when large open economies can erroneously be characterized as closed economies (Squalli and Wilson, 2011, and Warburton, 2012). Openness in terms of the relative share (RS) as opposed to TS can be defined as: 0 1 2 3 4 5 5 6 ; r t t t t t t t t t X K L Y C O bb b bbyb b bxe = + + + + + + + +

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