Estimation of Elasticities and Interpretation of Results

Estimates of the response of imports and exports to price changes are interesting and important for a variety of purposes. On an aggregate level, the investigator or policy maker may wish to know what effects exchange-rate realignments may have on the trade balances of different countries. Or, put differently, the problem may be to determine the exchange-rate change required to eliminate a trade imbalance of a given size. Exchange-rate changes will also affect aggregate income and employment as a consequence of the expenditure shifts that occur and that result in the expansion or contraction of a country’s export and import-competing industries. To cope with issues like these, information on the relevant elasticities of demand and supply is necessary.