The Trade Effects of MERCOSUR and The Andean Community on U.S. Cotton Exports to CBI countries

DAND = dummy variable for the Andean Community members

Earlier studies that utilized similar import demand models, made the import value
(price times quantity) the dependent variable. However, to remain consistent with
economic theory the dependent variable in this study is the quantity of U.S. cotton
imported. Prices used for this study are unit values for exports and imports, calculated by
dividing the value of trade by the quantity of trade. From economic theory, price and
quantity have a negative relationship. It is therefore expected that an increase in the price
of cotton will result in a decrease in the quantity of cotton demanded/imported and vice
versa.

According to Koo, Kamera, and Taylor (1994), the income (GDP) of exporting
countries represents the country’s production capacity, and the income of importing
countries represents the country’s purchasing power, both of which are positively related
to trade flows. It is expected that an increase in income in the importing country will
result in an increase in that country’s imports of U.S. cotton. An increase in real GDP
should increase imports, depending on how sensitive the consumption is to changes in
income.

Bajpai and Mohanty (2008) argued that the exchange rate is arguably the single
most important variable in determining the economic environment for trade sectors. In
addition, Koo, Kamera, and Taylor (1994), asserted that exchange rate is one of the most
important factors affecting trade flows. In this study, the exchange rate is a ratio of the
CBI top importers’ currency to the U.S. dollar. Economic theory predicts that U.S.
exports will decrease when the U.S. dollar strengthens/appreciates relative to the
currency of the importing country, and vice versa. Furthermore, as the U.S. dollar gains

<<   4   5   6   7   8   9   10   >>

More intriguing information