A Statistical Note on World Demand for Exports

Author(s): Tse Chun Chang

Source: The Review of Economics and Statistics, Vol. 30, No. 2 (May, 1948), pp. 106-116
Published by: MIT Press
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 A STATISTICAL NOTE ON WORLD DEMAND
FOR EXPORTS
TSE CHUN CHANG
This note outlines a statistical investigation
into (i) the factors determining the world
demand for exports of individual countries
during the cyclical changes of the interwar
period; and (2) the price elasticity of substitu-
tion between two commodities in the world
market, as supplied by two different countries.
INTERNATIONAL COMPARISON OF
INCOME ELASTICITIES
The variations in the quantity of exports of
a country may be correlated with, and ex-
plained by, changes in several predominant
determinants- a treatment which is similar to
my treatment of demand for imports.' In gen-
eral, the determinants are changes in the level
of world real income, changes in the export
prices of the exporting country, and changes in
the prices of substitutes supplied by com-
petitors in the world market. Accordingly,with
the trend of all the series eliminated, the partial
correlationis of the form
log xi=b12.34log x2-b13.24log x3+bl4.23log X4,
where xi, X2, X3, and X4 are respectively the
quantity of exports of a particular country, the
world real income, the export prices of the
country in question, and the export prices of its
competitors in the world market. Hence, the
regression coefficients indicate the respective
elasticities required. The square of the multiple
correlation coefficient gives the percentage of
the sample variance of the quantity of exports
which can be accounted for by the variations
in all these determinants.2
1 See my articles, "The British Demand for Imports in
the Inter-war Period," Economic Journal, June 1946, and
"International Comparison of Demand for Imports," Re-
view of Economic Studies, xiii (No. 2).
2The usual regression analysis assumes the whole error-
variation concentrated in the dependent variable. Theo-
retically, the estimates of the various elasticities are therefore
not the best estimates of the true structural relationship
existing in the data. However, the error is probably not
[io6]
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Here, we encounter the difficulty of finding
the appropriate index to represent the prices
of substitutes. Moreover, this problem is
further complicated by the following three
factors: (i) the variations in exchange rates;
(2) similar goods supplied by different coun-
tries not always competing in the same
world market; and (3) the problem of cor-
recting for the tariff changes imposed upon
the exports of a particular country. How-
ever, for our present purpose, we adopt a
method of approximation. As far as possible,
we try to compile an index of the prices of sub-
stitutes for a country whose exports belong
mainly to a certain economic class. This index
is obtained by taking a weighted average of the
indices of export prices of a number of coun-
tries whose exports are broadly in the same
economic class as the exports of the country
under investigation. The weights are given in
accordance with the relative shares of the
countries in total world export trade; and the
separate indices are reduced to terms of the
currency of the particular country, by use of
the average exchange rates of the year. For
instance, for the United Kingdom, an index of
the prices of substitutes in the world market
is compiled by taking a weighted average of the
export prices, in terms of sterling, of four
principal industrial competitors- U. S. A.,
France, Germany, and Japan.
Moreover, partly because of the fact that
exports from a country are frequently so dif-
ferent from exports from other countries, and
partly because of the amount of work which is
necessarily involved in the compilation of in-
dices for individual countries, we are further
compelled to use, in some cases, an even more
general method. Here, we regard the competi-
tion among countries in the world market as
large; but the method is simple. Cf. G. Tintner, "Some
Applications of Multivariate Analysis to Economic Data,"
Journal of American Statistical Association, December 1946.
 A STATISTICAL NOTE ON WORLD DEMAND FOR EXPORTS I07

taking place not by substituting for each other's TABLE I. -ELASTICITIES OF WORLD DEMAND FOR
EXPORTS OF INDIVIDUAL COUNTRIES a
similar exports, but by acquiring a larger share
of total world exports through price cutting. Multiple Income Relative-
Accordingly,we use the index of prices of total Country Correlation Elasticity Price-
Coefficient Elasticity
world exports in gold as a representative index. I. World as a whole 0.89 1.50 -0.56
In order to simplify our calculations, we II. Industrial countries
divide home export prices by prices of substi- A. Highly industrialized and
tutes in the same unit of currency; conse- self-sufficient type
quently, the price elasticity of world demand U. S. A. 0.97 2.91 -0.43 e
B. Highly industrialized and
for home exports is a relative-price-elasticity. deficient type
The effect of tariff policy can be traced in the Germany 0.84 2.00 -o.58 d

trade statistics for a single country, but cannot U. K. 0.94 I.8I -0Q40e
C. Relatively less industrial-
be estimated for exports as a whole; it is there- ized type
fore ignored in our calculations. Sweden 0.94 I.50 -0.36

The results of our statistical calculations are France o.8i I.23 -0.77 g
Switzerland 0.90 I .36 -0-44
given in Table i. An examination of these re- Japan 0.70 i.o8 -o.6oi
sults reveals that the quantity of exports from Italy 0.70 0.95 -0.8i h
industrial and mining and raw-materialproduc- III. Mining and raw-material
ing countries tends, in general, to fluctuate producing type
Chile 0.93 3.38 -0.I7 h
more violently with respect to world real in- Canada 0.9I I.52 - 0.35
come changes than the quantity from agri- British Malaya 0.74 I.52 -0.I8 h
cultural countries. So far as the magnitude of South Africa o.8o I.17 -0.3I h

income elasticities is concerned, the former IV. Agricultural countries

Estonia 0.9 I 0.89 - I.29
group has a value greater than unity, whereas Argentina o.87 o.88 -0-46 k
the latter group has a value well below unity. Latvia 0.8i 0.84 - I.84h
New Zealand 1
Moreover, if we take the income elasticity of 0.83 0.72 -0.52
Finland 0.84 0.72 - I.23 h
demand for the exports of the world as a whole Norway 0.79 o.62 -o.62 h
as a mean, the elasticities for the countries in Hungary 0.83 o.6i -_ . I0

the former group tend, in general, to lie above
it, while those for the countries belonging to
the latter group lie below it. Looking at the
results broadly, we find that Table i depicts a
situation which is the reverse of that found for
the income demand for imports of individual
countries.' The countries whose import income
elasticity is less than that of the world as a
whole are those whose export income elas-
ticity is greater than that of the world as a
whole; and conversely. Or, speaking more
generally, for the former cases, the import in-
come elasticity tends to be smaller than the ex-
port income elasticity; whereas, for the latter
cases, the export income elasticity tends to be
smaller than the import income elasticity. This
Eire o.80 0.55 -o.65m
Denmark o.80 0.35 -0 .45n
Australia 0.92 0.22 -o.66 n
a The period covered in our calculations is in general from I924 to
I938. The quantity and price indices for individual countries are ob-
tained from League of Nations' Review or World Trade, I938. The
countries are classified in accordance with the predominant features
of their structure of trade; therefore, the classification is not without
arbitrariness. For instance, Canada and South Africa have a kind of
mixed economy of agriculture and raw-material production. Never-
theless, our classification enables us to draw some generalizations with
regard to the various elasticities.
b The quantity and price indices are those calculated by the League
of Nations. The index of real world income is compiled by taking the
weighted average of the estimates for fourteen countries in the period
I924-38. (For detailed description of the procedure, see my article,
"International Comparison of Demand for Imports," in Review of
Economic Studies, Vol. xiii, No. 2.) In the following, when we discuss
the world income-demand for a particular country's exports, we have
to make the necessary correction by eliminating the country's index
from the aggregate. But for the countries not included in our com-
pilation, we use the aggregate index of real world income without any
correction.
For the following notes, except note h, the data are weighted aver-
age export prices for the countries specified:
c U. K., Germany, Japan, and France, in terms of U. S. dollar.
d U. K., U. S. A., Japan, and France, in terms of old U. S. dollar.
e U. S. A., France, Japan, and Germany, in terms of pound sterling.

fact points out a fundamental phenomenon in
the cyclical fluctuations in the balance of trade
of different trading countries; that is, given an
equal magnitude of rise of real income all over
the world, the former group will experience a
favorable change in relative quantities, and the
I pound sterling.
Cf. my "International Comparison . . .," op. cit.
The elasticities are slightly different from my previous ones (see C. F.
Carter and T. C. Chang, "A Further Note on the British Balance of
Payments," Economica, August I946), because here the index of rela-
tive prices is used.
f U. K. and U. S. A. in terms of krona.
g U. K., U. S. A., Japan, and Germany, in terms of franc.
h Prices of total world exports in gold.
' Germany, U. S. A., U. K., and France, in terms of yen.
J Australia, New Zealand, and Argentina. in terms of pound sterling.
k Australia, Canada. and New Zealand, in terms of pound sterling.
Australia, Argentina, and Canada, in terms of pound sterling.
Australia, Argentina, Canada, and New Zealand, in terms of
11Argentina, Canada, and New Zealand, in terms of pound sterling.

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io8 THE REVIEW OF ECONOMICS AND STATISTICS
latter an unfavorable change. The converse
will be true in the case of an economic contrac-
tion of equal magnitude.4
With regard to the elasticities of various
types of country, some generalizations can also
be made. The world demand for the exports of
industrial countries shows an elastic change
with respect to world real income, except in the
case of Italy. The difference in the relative
magnitude of income elasticities reflects, in
general, the composition of manufactured ex-
ports from these countries, which is funda-
mentally determined by the stages of industri-
alization. For instance, it is interesting to find
that, since exports from the U. S. A. consist
more of investment goods and high-standard-
of-living goods than do the exports from the
4But the net change in the relative quantities is the
combined results of cyclical changes in both income and
price. All price indices are sensitive to the trade cycle; and,
therefore, the import and export prices of a given country
tend to rise and fall together with the world cycle. The
influence of price changes upon the relative quantities is
determined by the magnitude of the relative-import-price-
elasticity and the relative-export-price-elasticity. Never-
theless, this influence tends, on the whole, to be small, be-
cause of the low values of these elasticities which are
usually found. The general reason for the low relative-
import-price-elasticity is the fact that the imports of a
country consist mainly of commodities which cannot be
produced, or cannot be produced cheaply, at home. The
relative-export-price-elasticity also tends to be low in most
cases, because there exists, as in the home economy, an
imperfect market. Moreover, even if the magnitude of this
price elasticity is high, the cyclical change in the export prices
of a country may still not induce large absolute change in
its export quantity. During a period of world-wide eco-
nomic fluctuations, the prices of the competitors' exports
move closely with those of the home country. Thus, given
an equal amplitude of fluctuations, the rise or fall of the
home export prices relative to those of the competitors does
not tend in general to be large. Consequently, the absolute
change in the export quantity due to this factor may not
be large.
Nevertheless, the net change in the balance of merchan-
dise trade is related to values of imports and exports, which
are the product of their respective quantities and prices.
Therefore, the predominant influence of cyclical change
of prices lies in the determination of values rather than of
quantities. In reality, the import prices and the export
prices of a country do not change at an equal rate; there-
fore, during the cyclical fluctuations, the terms of trade of
a country may become favorable or unfavorable. Empirical
investigations show that, for individual countries, the
cyclical change in the relative quantities and that in the
relative prices tend, in general, to be in opposite directions.
As a result, the favorable or unfavorable change in the
terms of trade tends to offset the corresponding unfavorable
or favorable change in the relative quantities. But further
empirical investigations show that, in most cases, the change
in the former does not completely offset the opposite
change in the latter.
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other industrial countries, the income elasticity
of world demand for American goods is the
highest in the group. The relatively low income
elasticities for Japan and Italy show, among
other things, the fact that their manufactured
exports are designed mainly to meet consumers'
needs, such as textile goods, apparel, and so
forth, which tend to fluctuate less violently
than investment goods during the trade cycle.
Moreover, in Table i, the income elasticities
of world demand for American, German, and
British exports are given as 2.9, 2.0, and i.8
respectively. This means that the cyclical
fluctuations in the quantity of exports from the
U. S. A. are the most violent with respect to
changes in real world income, those from the
U. K. are the least violent, and those from
Germany stand between the other two. This
fact may also be accounted for by the difference
in the composition of exports from these three
highly-industrialized countries. Without going
into detailed comparisons of the export com-
position of these three countries, we quote for
illustration the results of an interesting study,
made by Der Deutsche Aussenhandel hunter
der Einwirkung Weltwirtschaft-Strukturwand-
lungen.5 According to this study, in the
seventeen years from I9I3 to I929, over
half of a sample covering eighty per cent of
total British exports consisted of commodities
for which the world demand had increased by
less than 75 per cent; forty per cent con-
sisted of commodities for which the world
demand had risen by 75-I50 per cent; and the
commodities for which the world demand had
risen by more than I 50 per cent comprisedonly
five per cent of total British exports. In sharp
contrast, American exports for which the world
demand had increased over I50 per cent
amounted to one-third of the country's total
exports. The record for Germany, however,
stood between that of Britain and America.
Although Germany's position regarding the
more-than-I5o per cent group was nearly the
same as that of the British, yet about two-
thirds of the German exports belonged to the
group for which the world demand had risen
from 75 per cent to I 50 per cent. The commod-
'The results are quoted in E. Staley, World Economic
Development (International Labour Office, 1944), pp. 150-
5I.
 A STATISTICAL NOTE ON WORLD DEMAND FOR EXPORTS
ities in the less-than-75 per cent group were
mainly apparel and products of cotton in-
dustries; while those in the more-than-I50 per
cent group were such goods as rubber products,
automobiles, rayon and rayon yarn, electrical
communicationdevices, etc.6 Empirical studies
have shown that the commodities which were
expanding most in international trade were
those commodities for which the world income
demand was most elastic during cyclical fluc-
tuations; and conversely.7 Therefore, with an
economic expansion of equal magnitude all
over the world, American exports would have
benefited the most; German exports would
have stood second; and British exports third.
As would be expected, exports from mining
countries show an elastic demand with respect
to changes in world real income. This is be-
cause mining products are generally used by
heavy industries. A very good example is
provided by Chile, where more than 85 per cent
of total exports in I927-29 consisted, on the
average, of nitrates of soda and copper ores.
To some extent, this is also true of South
Africa, because more than half of her exports
in I92 7-29 was gold bullion and diamonds.
Moreover, the agricultural countries, whose
exports consist mainly of raw materials rather
than of foodstuffs, find elastic world income
demand for their exports. This is true, for in-
stance, for British Malaya, whose rubber and
tin exports amounted to more than 40 per cent
and 25 per cent, respectively, of the total value
of her exports in I927-2 9. Similarly, Canada
exported, besides wheat, huge quantities of
timber and mineral ores.
Lastly, the agricultural countries whose ex-
ports consist mainly of foodstuffs find that their
exports change much less in proportion to real
world income. It is interesting to see that the
income elasticities of world demand for exports
Ibid.
No calculations of the income elasticities of world
demand for different categories of commodities exported
from a single country have been attempted. Nevertheless,
the results from my previous treatment of the British im-
port demand may be used here to support the argument.
It has been found that the income elasticities of British
demand for silk manufactures, for electric goods and appa-
ratus, and for vehicles are much higher than those for
apparel and for the products of cotton industries. See my
article, "The British Demand for Imports . . . ." op. cit.,
p. 204.
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I09
from three main food-producing countries, i.e.
Eire, Australia, and Denmark, are very low
indeed.
SOME GENERAL REMARKS ON
PRICE ELASTICITY
In the classical theory of international trade,
it is generally assumed that the price elasticity
of world demand for a single country's exports
is very high so that any country, by lowering
its export prices by a small fraction, would be
able to attract to itself a considerable part of
its competitors' market. But the results of our
statistical calculations, as shown in Table i, do
not seem to confirm this view. As a matter of
fact, the price elasticity of world demand for a
single country's total exports tends in general
to be less than unity. It is only in unimportant
cases of very small agricultural countries, such
as Estonia, Latvia, etc., that we find that the
changes in export quantities are elastic with
respect to the changes in their respective ex-
port prices; and, moreover, that the elastici-
ties are not much greater than unity.
The very low price elasticity of world de-
mand may be explained as follows: First, like
the prevailing state of affairs in internal mar-
kets, competition in international markets is
imperfect, owing to traditional trading con-
nections, the ignorance of home consumers
about world supply conditions, special prefer-
ence for the exports of a particular country,
etc. Secondly, the total exports of a particular
country can never be perfect substitutes for
those of another country in the world market,
even if they, as a whole, belong to the same
economic class. A rise in Danish export prices
may decrease the world demand for Danish
butter and bacon and induce increased pur-
chases of Argentine meat instead; but it is un-
likely that such substitution between goods
that are not exactly similar can be very in-
tensive. Moreover, the less homogeneous the
exports of two countries, the less intensive the
substitution between them in the world market.
For instance, if export prices of an agricultural
country rise, the substitution of exports of an
industrial country will be very limited.
It should also be observed that the size of a
particular country's share in total world ex-
ports also influences the value of the price
 THE REVIEW OF ECONOMICS AND STATISTICS
elasticity of world demand for its exports. have to eliminate this effect. Accordingly, the
When we compare a large country in world regression equation becomes
trade with a smaller one having exports of log (ql/q2) =-a log(Pl/P2)+b log I,
broadly the same character, we should expect
where I is the real income in a given market.'0
the elasticity for the larger country to be lower.
1
It is very likely that the value will tend to be After the actual calculations of this section had been
completed, there appeared in this REVIEW an interesting
less than unity. The reason is analogous to the article by Professor Tinbergen, discussing the same problem
comparison of the market of a single firm with ("Some Measurements of Elasticities of Substitution," in
that of an industry. Moreover, even if the ex- the issue of August 1946). The aspects of the problem we
are not entirely similar to those discussed by Pro-
ports of a smaller country are concentrated in discuss
fessor Tinbergen. One of his measurements concerns "quota
a given market and are the main source of elasticity." In application, he has calculated the regression
supply in it, the value of the price elasticity will coefficient of "the ratio of the quantum index of exports of
the given country to the quantum index of world trade" on
not tend to be large. "the ratio of that country's price index of exports to the
price index of world trade." This procedure would not
PRICE ELASTICITY OF seem justifiable, because the variations in the "quantum
ratio" cannot be entirely accounted for, in the present case,
SUBSTITUTION by those in the "price ratio." During the cyclical fluctua-
tions, the variations in the "quantum ratio" reflect also the
In Table i, we have tried to find (i) the influence of changes in world income demand. As has been
aggregate" price elasticity of world demand shown in Table i, because the relative composition of a
for total exports of a single country and (2) the given country's exports is different from that of the world
trade (i.e., the exports of all countries), there is bound to
proportionate change in the absolute quantity be a shift in the distribution of the quantity of exports
of exports of a country associated with a pro- between different countries as a result of the world income
portionate change in the level of home export change. Moreover, this shift would still take place even if
prices all over the world remained unchanged. Let us take
prices relative to competitors' export prices. the case of an agricultural country as an example. During
Now let us look at the same problem again a period of world boom, its index of export quantity tends
from another angle. It may be interesting to to rise less than the world index. As a matter of fact, this
is due not only to the more violent rise of its price index
calculate the price elasticity of substitution relative to the world index, but also to the unfavorable
between two commodities (or two groups of cyclical shift against the agricultural countries in the
commodities) in the world market, as supplied distribution of quantity of total world exports in boom.
Therefore, Professor Tinbergen's calculation would seem to
by two different countries. In this simplest overestimate the magnitude of the price elasticity of substi-
case of two commodities, the price elasticity of tution.
substitution is defined as the ratio of the pro- Some impression of the order of magnitude of the bias
in Professor Tinbergen's elasticities can be found from the
portionate change in the relative export quan- League of Nations' index numbers for the quantum and
tities to the proportionate change in the rel- prices of foodstuffs, raw materials, and manufactured goods.
ative export prices.' His correlations are, on the whole, rather poor and his
results are, it would seem, almost completely determined by
To obtain a numerical value for the price the relative fall of the various indices from 1929 to the
elasticity of substitution in the case of two depression low. Taking for the latter the average of the
homogeneous commodities, a simple regression years 1933 and 1937, we find the following index numbers
(I929= IOO): Quantum Price
equation of the form Foodstuffs ................ 88.5 46.o
log (ql/q2) = -a log (pl/p2) Raw materials .............. 9g8.o 44.5
Manufactured goods ........ 74.0 53.5
is used, where qi and q2 are the export quan- Total trade ................ 86.o 47.5
From these figures follow these quasi-elasticities of substitu-
tities and pi and P2 are the corresponding tion for the trade of all countries exporting each of the three
prices.' The regression coefficient is the re- types of commodities:
quired elasticity. But in the case of two groups Countries exporting foodstuffs 47.5 2.5 -0.9
of commodities of broadly similar character, 86 -1.5
the change in the ratio of relative quantities 47.5 12
Countries exporting raw materials X = -2.2
reflects also the difference between the income 86 -3
Countries exporting manufactured goods
elasticities of demand for them; therefore, we 47.5 -I 2
8 J. R. Hicks and G. D. H. Allen, "A Reconsideration of
~~X ~= -I.I
86 6
the Theory of Value," Economica, May I935. Thus Tinbergen's elasticities would appear to be at least of
'Trend of all the series eliminated. the order of -i too large.

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 A STATISTICAL NOTE ON WORLD DEMAND FOR EXPORTS III

In the following, we shall inquire into the market. For instance, a rise in the prices of
price substitution (i) between exports of a American refrigerators may drive away world
broadly similar character of two countries in demand in favor of buying, say, more British
the world market; ( 2) between completely wireless sets. If Canadian cheese becomes
homogeneous exports of two countries in the dearer, world demand may shift to Danish
world market; (3) between completely homo- butter or Irish beer.
geneous exports of two countries in a given For the purpose of illustration, we choose
market; and (4) between imports and similar (i) the exports from two industrial countries
home-producedgoods in the home market. and (2) the exports from two agricultural
The first illustration of the elasticity of sub- countries. For the former, we compare the
stitution is provided by the case in which two price substitution between British and Amer-
countries compete in the world market with ican exports and British and Swedish exports,
goods belonging to the same economic class. as shown in Chart i, sections A and B.1" For
Here, as distinct from the case of homogeneous the latter, the substitution between Argentina,
goods, the substitution is remote and imperfect.
However, it takes place in the form of com- "lPrices are reduced in terms of pound sterling; and the
income effect has been eliminated. The series are deviations
petition for purchasing power in the world from their respective trends.

CHART I. - COMPARISON OF PRICE ELASTICITIES OF SUBSTITUTION BETWEEN Two GROUPS OF COMMODITIES

IN THE WORLD MARKET, AS SUPPLIED By Two DIFFERENT COUNTRIES

Y
LOG Y
LOG
E.F
NEWZEALAND.-AUSTRALIA ARGENTINA
- AUSTRALIA

2.1 2.1I

t4 PrIce-Rot/o %rc-o1
N I
2.0~ ~~ AN

Ouanicy-RafIo

2.1 2.1 reRal

2.0 0%

1.9 1.9 Ouon/i/y-~R/otl

2.12.

1.9 1.9
/t'P/ce Rotlo

24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38

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II2 THE REVIEW OF ECONOMICS AND STATISTICS
Australia, Denmark, Eire, and New Zealand the change in their relative prices may not
are studied and shown in sections C, D, E, and bring about a more than proportionate change
F.'2 From the chart, it can be seen that, al- in their relative quantities.
though the correlation is generally low, there In order to get a clearer picture of the price
are traces of negative correlation between the elasticity of substitution, we should consider
proportionatechanges in the relative quantities homogeneous exports from two countries and
and relative prices for the period as a whole. also their competition in a common specified
The elasticities for the individual cases are market. To this task, we now turn.
shown in Table 2. Let us consider price substitution in the
TABLE 2. -ELASTICITIES OF SUBSTITUTION OF TOTAL
world market between homogeneous staple
EXPORTS FROM Two COUNTRIES 1 commodities exported from any two countries;
as the commodities, we choose wool, butter,
Commodity Elasticity
and cheese.
I. Manufactured Goods
A. U. K./U. S.A.2 -0.3
Australia, New Zealand, and South Africa
B. Sweden/U. K. -o.87 are the world's most important wool exporters;
II. Agricultural Products therefore, we study the price substitution for
C. Eire/Australia -0.33 their export quantities. For butter, we choose
D. Denmark/Australia -0.42
E. New Zealand/Australia -0.25
New Zealand and Denmark; and, for cheese,
F. Argentina/Australia -0.76 Canada and New Zealand. WVithtrend elimi-
'The share of each country's exports in the world total (average nated, the indices of quantity ratio are com-
value, 1927-29) is as follows:
pared with their respective indices of price
Industrial countries Agricultural countries
U. S. A.
U. K.
15-4%
IO.8%/
Argentina
Australia
3 .0%
2.2%
ratio in Charts 2A and 2B. A fairly high degree
Sweden I-4% Denmark
New Zealand
I.3%
o.8%
of negative correlation between the variations
2 For U. S. A.,
Eire 0.7%
the indices of semimanufactures and manufac-
in quantity ratio and those in price ratio is
tured goods only are used. presented in each case. Any change in the rel-
Owing to the limited number of cases treated, ative prices of homogeneous staple exports of
it would seem dangerous to draw any definite two countries therefore leads to substitution
conclusions based upon these statistical results. between them in the world market. The nu-
But, in general, the low price elasticity of sub- merical values of the price elasticities of substi-
stitution may be explained by two facts. First, tution are given in Table 3.
in reality, the total exports of two countries,
even if they are more or less of the same TABLE 3.- ELASTICITIES OF SUBSTITUTION BETWEEN
STAPLE EXPORTS OF Two COUNTRIES IN THE WORLD
character, do not provide perfect substitutes MARKETS
for each other in the world market; and,
therefore, their substitution should not be in- Commodity Correlation Elasticity
Coefficient
tensive with respect to price changes. Sec- I. Wool'
ondly, "world market" is an ambiguous no- South Africa,/New Zealand -o.6o -1.30
tion. As a matter of fact, each country has its South Africa/Australia -0.78 -1.10
Australia/New Zealand -0-73 -o.69
own "exclusive" market; 13 and exports of
II. Butter 2
similar goods of other countries do not compete New Zealand/Denmark -o.67 -1.35
on an equal footing with home exports every- III. Cheese '
where in the world. Consequently, when the Canada/New Zealand -0.59 -1.32
total exports of two countries are considered, 1 WNool: Export quantities of these countries are taken from their
12
respective Official Yearbooks. New Zealand Yearbook provides also
For all these countries, export prices in gold are used. the index of the export price of wool. For South Africa, the index of
Trends of all these series have been removed. the export price is compiled by weighting the export prices (pence
" For instance, we may treat the per pound) of various years by the actual export quantity in I930.
Latin-American For Australia, we use the average market price per pound of greasy
countries as the "exclusive" markets of the U. S. A., because and scoured wool and the export quantity of I929-30 as weight. In
the calculations, all the price indices have been reduced to pounds
the former countries drew, before the Great Depression, sterling on the basis of the annual average exchange rates of these
more than 30 per cent of their respective total imports currencies to the British pound.
2 Butter: Export quantities of the two countries are taken from
from the latter. In the case of Haiti, the percentage was as their respective Yearbooks. The prices are average annual wholesale
high as more than go per cent. Similarly, Eire, India, South price per pound in Denmark and in New Zealand, as given in Agri-
cultur(ll Statistics (U. S. Department of Agriculture).
Africa, New Zealand, and Australia may be regarded as the 3Cheese: FQr New Zealand. the average wholesale price per pound
"exclusive" markets of Britain. of full-cream cheese in New Zealand is used. For Canada, we use
the export price. All the indices are reduced to the U. S. dollar.

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 A STATISTICAL NOTE ON WORLD DEMAND FOR EXPORTS
CHART 2A. -COMPARISON OF PRICE ELASTICITIES OF CHART 2B. - COMPARISON OF PRICE ELASTICITIES OF
SUBSTITUTION OF STAPLE GOODS IN THE WORLD SUBSTITUTION OF STAPLE GOODS IN THE WORLD
MARKET MARKET
LOGY
LOGY
CHEESE:
WOOL: CANADA-NEWZEALAND
SOUTHAFRICA-AUSTRALIA

2.1
2.1 Ovonfityfy.Roio

2.0
2.0 doIf

1.9
I'9
1.9 /

~ ~ '-
\ -w Price-Rafio

BUTTER:
WOOL: NEW ZEALAND - DENMARK
SOUTHAFRICA-NEW
ZEALAND

2.1 Ouantity-Ratio

2.0 A. ' 2.0 dt--

A
.9 - Price-Rt/io

1.9 -
1.9
V Price-Ratio I
I I I I lI I _I I I I
27 28 29 30 31 32 33 34 35 36 37 38
-NEW ZEALAND
WOOL:AUSTRALIA

2.1 Quantity-Ratio It is also possible to calculate the price

2.0
1.9- Price-Rato
I I I I I I I 1 I 1 I 1' I I
P4 25 26 27 28 29 30 31 32 33 34 35 36 37 38
Compared with the results in Table 2, the
correlation coefficients are much improved.
This is what would be expected, because de-
mand tends, in general, to react more sensitively
to variation in the prices of homogeneous goods
exported by different countries than to varia-
tion in the prices of broadly similar goods.
Moreover, the price elasticity of substitution
is generally greater than unity; but, contrary
to the generally accepted view, it is not very
high. In the case in which the two suppliers are
almost equally important in the world market,
the elasticity should tend to be low. This is
illustrated by the wool exports from New
Zealand and Australia.
elasticity of substitution between homogeneous
exports of two countries in a given market. The
results of such calculations are given in Table 4.
When homogeneous commodities compete in
V a given market and there is no special trade
discrimination against any of them, the price
elasticity of substitution between them tends
to be very high; and so is the correlation
coefficient. Moreover, in the case of a partic-
ular commodity, the difference in the size of
the elasticities would seem to suggest that the
relative size of different suppliers in the given
market is important. The smaller the supplier,
the larger the price substitution for its compet-
itors' similar exports; and conversely. For in-
stance, in the case of butter, the average ratio
of the amount supplied by Denmark to the
amount supplied by New Zealand in the British
market for the period is approximately equal
to one; whereas the Dutch supply amounts
only to about I 5 per cent of either. We find,
therefore, that the price substitution of Dutch
butter for both Danish and New Zealand butter
is much more intensive than the price substitu-

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II4 THE REVIEW OF ECONOMICS AND STATISTICS
TABLE 4. - ELASTICITY OF SUBSTITUTION BETWEEN be larger than unity. But the absolute values
HOMOGENEOUS EXPORTS OF Two COUNTRIES IN A are relatively low. This may be explained by
GIVEN MARKET
the fact that products of different countries are
Market Correlation Elasticity not equally suitable for various industrial uses.
Coefficient
When unequal income demand for British
I. British market and Japanese cotton piece goods in a given
A. Butter 1
Denmark/New Zealand -0.73 - 2.84 market has been eliminated statistically, we
Netherlands/Denmark -o.69 -4. II find that a change in the relative prices in-
Netherlands/New Zealand -0.7I -4.67
duces a more than proportionate change in
B. Wheat 2
Argentina/Canada -0.87 -5.04 relative quantities. This is illustrated by the
Australia/Canada -0.83 -4.18 Indian and Chinese demands.
Argentina/Australia -0.82 - 5.80
The last illustration of price substitution is
Uruguay/Canada -0.74 -6.30
C. Raw cotton (except winters) provided by the case of similar home-produced
Brazil/U. S. A. -o.8o -I .7 goods competing with imports. Here, we
Egypt/U. S. A. -0.73 -I.45
study the British demand for cotton manu-
II. Indian market
A. Cotton piece goods "' factures, for motor-cars, and for iron and steel
Japan/U. K. -o.8i - I .94 manufactures. The results of our statistical
III. Chinese market calculations are given in Table 5. It can be seen
A. Cotton piece goods 7
Japan/U. K. -o.87 -2.31 I
TABLE 5.- ELASTICITY OF SUESTITUTIONN BETWEEN
T'he quantities imported into the U. K. from the countries under BRITISH IMPORTS AND HOMXE-PRODUCEDGOODS
investigation are obtained from the Annual Statement of Trade of the
United Kingdont. The period covered is 1924-38. The prices are Correlation
calculated by dividing the import value in a given year by the re- Coefficient Elasticity
spective quantities.
2Annual Statenment. The prices are import prices.
*3Quantities are obtained from the Annual Statement. The prices British imports/British home-produced goods
are obtained from Agric7ultural Statistics (U. S. Department of Agri- i. Cotton yarns and manufactures1 -0.79 -3.54
culture).
4Quantity and price indices are obtained from the Annual Trade 2. Motorcars 2 -0.70 -2.62
Returns of India. 3 Iron and steel manufactures3 - o.64 -I .50
- Because British cotton piece goods are generally of higher quality
than the Japanese, the income elasticities of Indian demand for them
are different. 'Iherefore, we have to eliminate the change in the 1 The import prices have been corrected for tariff changes. The
relative quantities caused by income changes. The income index used indices of home output and home prices are taken from an unpublished
here is the figure given by Ahirras ("India's National Income," Revue dissertation by Mr. Y. N. Hsu at Cambridge University. Because im-
de lPinstitut International de Statistique, No. 4, 1936). ported cotton manufactures are generally low-quality goods, we have
rThe indices of quantity and price are obtained from the Chinese eliminated the income effects upon the relative quantities.
Customs' Report. 2 For 1929-38 only. The index for home output is obtained from
7The index of quantity of total imports is used as the best avail- Society of Motor Manufacturers and Traders, The Motor Industry of
able representative of real income in China. Great Britain; the 1938 figure from "Commercial History and Review
of 1938," The Economist, February 12, 1939. The index of output
includes private cars, taxis, commercial vehicles, and omnibuses, while
the price index relates to private cars only.
tion between the last two suppliers. Moreover, 3The indices relating to home production are obtained from MNr.
Tew's unpublished dissertation at Cambridge University.
it is also interesting to see that the price substi-
tution between Danish and New Zealand butter from the table that when there are home-
in a given market is more intensive than that produced goods similar to the imports, the price
in the world market, as shown in Table 3. elasticity of substitution tends to be high.
To the case of wheat, the same argument Bearing in mind the fact that only a limited
may be applied. As Uruguay supplies only number of cases has been treated in the above,
about 3 per cent of what Canada supplies in the we may draw the following two conclusions:
British market in the period under considera- First, between the total exports of broadly
tion, the price substitution between Canadian similar goods of two countries, the price sub-
and Uruguayan exporters is accordingly very stitution in the world market is in general less
high. than elastic; and, statistically, it is not possible
As the supply of cotton from Brazil and to obtain a good linear relation between the
Egypt to the U. K. is equal on the average logarithms. The main reason for the low elas-
in the period discussed to 20 per cent and 27 ticities would seem to be the imperfect sub-
per cent, respectively, of that imported from stitution between the total exports of any two
the U. S. A., the price elasticity of substitution countries.
between Brazilian and American cotton or be- Secondly, when the cases of homogeneous or
tween Egyptian and American cotton tends to standardized commodities competing in the

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 A STATISTICAL NOTE ON WORLD DEMAND FOR EXPORTS
world market are studied, the correlation co- TABLE 6. PRICE ELASTICITIES OF HOME AND
FOREIGN DEMAND
efficients are much improved; and the elastic-
ities tend to be larger than unity. But, contrary Home Foreign Sum of Two
Country Demand 1 Demand 2 Elasticities
to the traditional view, the absolute levels of
Latvia -0.48 - I .84 -2 .3 2
these elasticities are not much above one. Canada -I .34 - 0.35 -1 .69
Nevertheless, the price substitutions are inten- Hungary -0-54 - .IO -i.64
sive for homogeneous commodities competing Estonia -0.34 -I .29 -1 .63
Norway -o.86 -0.62 -.I48
in a given market. In general, the differences Finland -0.25 -1.23 -2 .48
in the elasticities of different suppliers seem to United States -0.97 -0.43 -I .40
reflect the relative size of a particular supplier Australia -o.67 -o.66 -I .33
France --0.32 - 0.77 -1I.09
in a given market. Denmark -o.63 -0.45 -I .o8
Italy - 0.2 7 -o.8i -I .o8
Japan - 0.47 -o.6o -1.07
EFFECT OF EXCHANGE Germany -0.37 -0.58 -0.95
DEPRECIATION South Africa -o.64 -0.31 -0.95
New Zealand -0.34 -0o52 -o.86
A well-knownproposition is that the effect of Sweden -0.37 - 0.36 - 0.73
exchange depreciation upon the balance of Switzerland -0.26 -0.44 -0.70
United Kingdom - 0.28 -0.40 -o.68
trade tends to be neutral when the sum of the Chile - 0.3 2 -0.17 -0.49
elasticities of home and foreign demand is equal
1 2c "International Comparison of Demand for Imports," RIvtcw of
to unity.'4 In other words, the value unity for Econotzi
2 See
Studies, XITi (No. 2).
above, Table i.
the sum of these two elasticities is the critical
value for the effect of exchange depreciation.' unity, exchange depreciation would worsen the
From our statistical measurementof price elas- balance of trade. Those countries at the head
ticities of home and foreign demand, we are of the table would tend to experience a favor-
able to see the effect of exchange depreciation able change in their balances of trade on ac-
upon the balance of trade of individual coun- count of exchange depreciation. But they are
tries. Table 6 shows the sum of the two elas- international debtors having interest payments
ticities for nineteen countries. fixed in terms of the creditors' currencies.
If it is assumed that these elasticities ap- These payments are equivalent to imports of
proximate the "true" elasticities, some general- perfectly inelastic demand, and their values rise
ization may be made. Table 6 shows that for a in proportionto the fall of exchange rates. Con-
majority of countries the sums of the two elas- sequently, the favorable change in the balances
ticities stand not far above or below the critical of trade may be cancelled by the unfavorable
value; therefore, the effect of exchange depre- change in the invisible items, so that their in-
ciation upon their balances of trade would gen- come accounts as a whole remain unchanged or
erally tend to be very small. In some cases even become unfavorable.
where the sum of the elasticities is well below As has been shown, the elasticities of substi-
Joan Robinson, Essays in the Theory of Employment tution between similar goods in a particular
(London, 2nd edition), pp. I42-43; and J. J. Polak, "Ex- market generally tend to be high. Therefore a
change Depreciation and International Monetary Stability," country whose balance of trade becomes less
this REVIEW, XXIX (I947), pp. I73-82.
"Strictly speaking, this proposition is true only in the favorable as a result of exchange depreciation
simplest case where trade is balanced in the first instance may find its balance of trade vis-ai-vis a par-
and the elasticities of home and of foreign supply are both ticular country improved.
infinite. This critical value would be affected if these two
conditions were not fulfilled. When trade is unbalanced,
A further qualification on the effect of ex-
this critical value becomes greater or less than unity accord- change depreciation may be added. The price
ing, as the value of imports is greater or less than the value elasticities from our calculations probably re-
of exports; whereas, on the other hand, the less-than-in-
finite-elastic supplies slightly reduce this critical value. In main constant only within the range of the
reality, as the ratio of import to export value is not greatly actual observations; beyond this they would
different from one, this critical value would not be much be expected to change. A very sharp deprecia-
affected. Therefore, in the practical discussion, we may still
use unity as the best approximation to the "true" critical
tion of the exchange rate may not necessarily
value. have a "perverse" effect upon a country's

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ii6 THE REVIEW OF ECONOMICS AND STATISTICS
balance of trade. Indeed, a favorable result imports may fall to zero. Therefore, at some
could be expected. The price elasticity of low level of the exchange rate, the sum of the
foreign demand tends to become even smaller two elasticities rises above the critical value
as the result of a large decrease in the exchange and a deficit in the balance of trade can be
rate, while on the import side the demand tends wiped out at the expense of very unfavorable
to become more elastic. In the limit where the terms of trade.
import prices become too high, the quantity of

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