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The Effects of Foreign Price Uncertainty on Australian Production and Trade

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Author Info
Elie Appelbaum () (York University, Canada)
Alan D. Woodland () (Faculty of Economics and Business, University of Sydney)

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Abstract

This paper provides a framework for the empirical analysis of the role of uncertain international prices for the Australian economy’s production sector and its international trade. We model the movement of traded goods prices via a bivariate GARCH model and embed this within an expected utility maximizing model of the production sector. We find that the empirical results are consistent with expected utility maximization and that the hypothesis of risk neutrality is soundly rejected. Estimates of the effects of changes in expected prices and volatility of traded goods prices upon production decisions and the return to capital are presented and discussed, as are the impacts of changes in output growth of Australia’s major trading partners. The overall conclusion is that price uncertainty matters for the Australian production sector.

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File URL: http://dept.econ.yorku.ca/research/workingPapers/working_papers/2008/trade.pdf
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Publisher Info
Paper provided by York University, Department of Economics in its series Working Papers with number 2008_03.

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Length: 24 pages
Date of creation: Jan 2008
Date of revision:
Handle: RePEc:yca:wpaper:2008_03

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Related research
Keywords: Price uncertainty; production under risk; expected utility maximization; international trade;

Find related papers by JEL classification:
F10 - International Economics - - Trade - - - General
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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  1. Wolak, Frank A & Kolstad, Charles D, 1991. "A Model of Homogeneous Input Demand under Price Uncertainty," American Economic Review, American Economic Association, vol. 81(3), pages 514-38, June. [Downloadable!] (restricted)
  2. David Gruen & Geoffrey Shuetrim, 1994. "Internationalisation and the Macroeconomy," RBA Annual Conference Volume, in: Philip Lowe & Jacqueline Dwyer (ed.), International Intergration of the Australian Economy Reserve Bank of Australia. [Downloadable!]
  3. Kreps, David M & Porteus, Evan L, 1978. "Temporal Resolution of Uncertainty and Dynamic Choice Theory," Econometrica, Econometric Society, vol. 46(1), pages 185-200, January. [Downloadable!] (restricted)
  4. Elie Appelbaum & Aman Ullah, 1997. "Estimation Of Moments And Production Decisions Under Uncertainty," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 631-637, November. [Downloadable!] (restricted)
  5. Wells, Graeme & Evans, Lewis, 1985. "The Impact of Traded Goods Prices on the New Zealand Economy," The Economic Record, The Economic Society of Australia, vol. 61(172), pages 421-35, March.
  6. Engle, Robert F. & Kroner, Kenneth F., 1995. "Multivariate Simultaneous Generalized ARCH," Econometric Theory, Cambridge University Press, vol. 11(01), pages 122-150, February. [Downloadable!]
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  7. Sandmo, Agnar, 1971. "On the Theory of the Competitive Firm under Price Uncertainty," American Economic Review, American Economic Association, vol. 61(1), pages 65-73, March. [Downloadable!] (restricted)
  8. Chavas, Jean-Paul & Holt, Matthew T, 1996. "Economic Behavior under Uncertainty: A Joint Analysis of Risk Preferences and Technology," The Review of Economics and Statistics, MIT Press, vol. 78(2), pages 329-35, May. [Downloadable!] (restricted)
  9. Subal C. Kumbhakar, 2002. "Risk preference and productivity measurement under output price uncertainty," Empirical Economics, Springer, vol. 27(3), pages 461-472. [Downloadable!] (restricted)
  10. Appelbaum, E., 1989. "Uncertainty And The Measurement Of Productivity," Papers 89-05, York (Canada) - Department of Economics.
  11. Mckenzie, Michael D., 1998. "The impact of exchange rate volatility on Australian trade flows," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 8(1), pages 21-38, January. [Downloadable!] (restricted)
  12. Appelbaum, Elie, 2006. "A framework for empirical applications of production theory without expected utility," Journal of Economics and Business, Elsevier, vol. 58(4), pages 290-302. [Downloadable!] (restricted)
  13. Appelbaum, Elie & Kohli, Ulrich, 1998. "Import-Price Uncertainty, Production Decisions, and Relative Factor Shares," Review of International Economics, Blackwell Publishing, vol. 6(3), pages 345-60, August.
  14. John Pitchford, 1993. "The Exchange Rate and Macroeconomic Policy in Australia," RBA Annual Conference Volume, in: Adrian Blundell-Wignall (ed.), The Exchange Rate, International Trade and the Balance of Payments Reserve Bank of Australia. [Downloadable!]
  15. Satyanarayan, Sudhakar, 1999. "Econometric tests of firm decision making under dual sources of uncertainty," Journal of Economics and Business, Elsevier, vol. 51(4), pages 315-325, July. [Downloadable!] (restricted)
  16. Elie Appelbaum & Ulrich Kohli, 1997. "Import Price Uncertainty And The Distribution Of Income," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 620-630, November. [Downloadable!] (restricted)
  17. Richard E. Just & Rulon D. Pope, 2003. "Agricultural Risk Analysis: Adequacy of Models, Data, and Issues," American Journal of Agricultural Economics, American Agricultural Economics Association, vol. 85(5), pages 1249-1256, December. [Downloadable!] (restricted)
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