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Growth, Expansion of Markets, and Income Elasticities in World Trade

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  • Yi Wu

Abstract

The Houthakker–Magee effect implies that a country facing unfavorable income elasticities in trade must either grow at a slower rate than its trading partners or experience a trend worsening of the current account and/or depreciation of the real exchange rate. Krugman (1989) first documented the existence of a “45‐degree rule” under which income elasticities are systematically related to growth rates. I develop a model which is a generalization of Krugman (1989) in several dimensions (including intertemporal). The intertemporal assumption of equal consumption growth for individuals across countries and the assumption of no intertemporal trade can be viewed as two extreme benchmarks. Empirical tests of the various 45‐degree rules suggest that it is misleading to treat income elasticities as structural, as is commonly done in forecasts of current account movements. The data also seem to be more consistent with the benchmark of no intertemporal trade than that of complete intertemporal trade.

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  • Yi Wu, 2008. "Growth, Expansion of Markets, and Income Elasticities in World Trade," Review of International Economics, Wiley Blackwell, vol. 16(4), pages 654-671, September.
    • Handle: RePEc:bla:reviec:v:16:y:2008:i:4:p:654-671
    DOI: 10.1111/j.1467-9396.2008.00770.x
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    2. Jane Haltmaier, 2014. "Cyclically Adjusted Current Account Balances," International Finance Discussion Papers 1126, Board of Governors of the Federal Reserve System (U.S.).
    3. Lavopa, A., 2014. "Catching up and lagging behind in a balance-of-payments-constrained dual economy," MERIT Working Papers 2014-042, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).

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