PRICEEFFECTS OF TRADE OPENNESS ON TRADED AND NON-TRADED GOODS IN PAKISTAN: AN APPLICATION OF H-O-S 2X2X2 MODEL International Journal of Economics, Commerce and Management

Please download to get full document.

View again

of 17
19 views
PDF
All materials on our website are shared by users. If you have any questions about copyright issues, please report us to resolve them. We are always happy to assist you.
Document Description
The key motivation behind this research was to empirically estimate the competitive effects of trade liberalization on prices of 22 selected consumer traded and 2 nontraded goods most frequently consumed by the poorest households in Pakistan. For
Document Share
Document Tags
Document Transcript
  International Journal of Economics, Commerce and Management United Kingdom Vol. II, Issue 8, 2014   Licensed under Creative Common  Page 1 http://ijecm.co.uk/    ISSN 2348 0386   PRICE EFFECTS OF TRADE OPENNESS ON TRADED AND NON-TRADED GOODS IN PAKISTAN: AN APPLICATION OF H-O-S 2X2X2 MODEL Shaikh, Naveed Ahmed Faculty of Management Sciences, Szabist, Dubai, UAE naveed@szabist.ac.ae Shah, Perveen Shah Abdul Latif University, Khairpur, Pakistan vc@salu.edu.pk Abstract The key motivation behind this research was to empirically estimate the competitive effects of trade liberalization on prices of 22 selected consumer traded and 2 nontraded goods most frequently consumed by the poorest households in Pakistan. For this, a theoretical framework of Heckscher-Ohlin-Samuelson model was used. For the study purpose, Time Series of retail domestic and international prices, household expenditure on various goods and import tariff on commodities stretched to the period of 36 years was used. The results confirm that a fall in tariff rates reduces the prices of all selected traded goods significantly that induces household demand for the goods. At the end, key limitations of this study and scope of future research were discussed. Keywords: Trade Liberalization, Trade and Non-traded Goods, Heckscher-Ohlin-Samuelson Model, Price Effects INTRODUCTION Pakistan, gesticulating a small open economy, has not been adhered historically to a single (open) trade policy. Prior to 1988, Pakistan has been following more inward looking import-substitution policy [For reference see Pakistan Trade Policy Review 1995 and Graphs 1 and 2 showing trend of Trade-GDP Ratio and overall effective tariff rates since 1970] as a major element of development process by subsidizing priority sectors such as textile and tobacco, to strengthen the export base by import of machinery at no or very low duty and penalizing the import of final products. [Notwithstanding, the overall effective rate of tariff and trade GDP ratios have been observing a falling and rising trends respectively since 1970 (even before 1988) ].   © Shaikh & Shah   Licensed under Creative Common Page 2 However, since 1988, Pakistan has successfully implemented economic reforms and consequently embraced a more open market oriented development strategies. Figure 1: Declining Effective Rate of overall Import Tariff (1970-2005)  After adoption of outward looking policies in the country, it would be interesting to look into the competitive effects of imports and exports on domestic prices of consumer goods purchased most frequently by poorest households. Figure 2: Rising Trade-GDP Ratio (1970-2005)    International Journal of Economics, Commerce and Management, United Kingdom   Licensed under Creative Common Page 3 The Classical Trade Theorists recommend the income effects as the key factor to the famous Stolper-Samuelson theorem, which relates international trade to the domestic distribution of income (Dixit and Norman, 1980). By the Heckscher-Ohlin theorem, a country has a comparative advantage in the good that intensively uses the country’s relatively abundant factor. Free trade will increase the relative price of that good and so, by the Stolper-Samuelson theorem, increase the real return of the relatively abundant factor by an even larger percentage.  At the same time, trade will reduce the return to the relatively scarce factor, though to a smaller degree. As a result, it can be said that changes in commodity prices due to trade liberalization magnify the resulting changes in factor prices. The main motive pursued here is to empirically estimate the competitive effects of trade liberalization on prices of selected consumer traded and nontraded goods most frequently consumed by the poorest households in Pakistan using theoretical framework of Heckscher-Ohlin-Samuelson model. Total 24 consumer goods have been selected for analysis. The number of traded goods is 22 and two are nontraded goods. The consumer goods selected here, have been segmented into two broad categories: Traded goods and nontraded goods. It would be important to note that the nontraded goods taken here are not similar to nontradables. Later are the goods which cannot be traded such as haircuts etc while the former are the goods that have not been traded during the study period (1970-2005), however they conceive chances to be traded at some time in future. For e.g. electricity and firewood (two nontraded goods here) can be traded given domestic production capacity and international demand and supply conditions. Furthermore, the paper is organized in the following way. Section 2 reviews the previous research work on the issue. Section 3 presents model explaining the theoretical justification of domestic prices of traded goods in a small open economy and the link between prices of traded and nontraded goods. Further, it elaborates the household demand function for the selected traded and nontraded goods. Section 4 is allocated for brief discussion on data type and sources. Section 5 includes discussion on empirical results and last section concludes the paper. LITERATURE REVIEW The existing literature [For comprehensive work on several key linkages see Winters. L. Alan (2000)] on the issue suggests that Growth effects and Price and Wage effects are the most important transmission channels of trade effects on economic growth and poverty of any country. Though the trade effects on economic growth are well researched and a visible consent has been developed amongst the researchers that open economies function better in aggregate than the closed ones and that open policies contribute more in the development of the country. On the contrary, the research on the other transmission channel (Price and Wage effects) is still under way and no clear cut consensus is achieved.   © Shaikh & Shah   Licensed under Creative Common Page 4 So far, browsing the work done on Trade-Poverty link via prices gives a mixed impression of trade effect on poverty via domestic prices. Christopher Barrett and Paul Dorosh (1996) have predicted the short run effects of rice price changes in Madagascar (partly induced by import policy). They estimated that one third of poor rice farmers could lose from higher prices or price variability partially linked with import policy. Studies such as Yung Y. Yang (1999) and Saggay,  A., Heshmati A. and Dhif M. A. (2005) have measured price effects of trade liberalization on Korean and Tunisian manufacturing sectors respectively. These studies are of much assistance to grasp the pricing behavior in these open economies at industrial level. Former has found a restraining effect of trade on domestic prices in Korean manufacturing industry. Whereas later have attempted to examine competitive effects of trade liberalization on domestic pricing behavior of Tunisian manufacturing industries and found that domestic prices do respond to greater import penetration. Another study (Swagel, 1995) has examined the competing goods effect on corresponding domestic (manufactured) prices in US and finds a small but significant effect of imported manufactured goods on domestic prices. Further, the study by Cogneau and Robillard (2000) finds significant changes in domestic prices and income using applied micro-simulation model in GE framework resulting from trade liberalization in Madagascar. The above studies provide a great assistance in developing a rich concept of competitive effects of trade on domestic prices. Nevertheless, no any study has been found which uses disaggregated household expenditure surveys as a parameter to investigate competitive impact of trade on prices of traded and nontraded goods selected from household budget expenditure. The major study found in this context has been done by Siddiqui et.al (2002) where researchers have attempted to investigate the impact of across the board tariff reduction on relative prices of goods in Pakistan using Household Integrated Economic Survey (GOP 1993). The study has confirmed that tariff cuts reduce domestic relative prices of goods in Pakistan. Though Siddiqui et.al (2002) has used Household Integrated Economic Survey in their analysis of link between tariff and relative prices of goods, yet it is of more general nature as it has used across the board tariff rate rather than commodity-wise tariff rates. Further, since the studies found in the existing literature are of more sector specific (for ex. manufacturing goods prices) nature and encompass across the board change in tariff rates, they do not offer much help in estimating the impact of trade liberalization on prices of goods forming household consumption bundles. The study in hand is different from the existing reviewed literature in a sense that it attempts to measure the impact of commodity-wise tariff changes on prices of goods which form the household consumption basket. Thus it is an attempt to contribute in filling the existing research gap between more general and sector specific price effects of trade and price effects on goods forming the household consumption bundles by examining the impact of change in commodity tariffs on prices of 24 traded and nontraded goods selected from household budget expenditure.    International Journal of Economics, Commerce and Management, United Kingdom   Licensed under Creative Common Page 5 RESEARCH METHODOLOGY Total 24 consumer goods have been selected for analysis. The number of traded goods is 22 and two are nontraded goods. For complete list of all goods see Table 1. The consumer goods selected here, have been segmented into two broad categories: Traded goods and nontraded goods. Model Domestic price determination of traded and nontraded good  s In a small open economy domestic prices of traded goods are determined by exogenous international prices and country’s trade policy. If the country e.g. levies tariff on imports t i on traded goods, the domestic price  P i would be given by (1 )  P P t i wi i    Here  P i and  P wi are the domestic and world prices of the traded goods i   respectively and t  i   is the rate of tariff applied on traded goods.  Assuming that the international price is exogenously determined, change in the local price would exclusively be established by the given change in the rate of tariff. This is shown in following equations. or or We can infer from above equations that given exogenous world price, the absolute change in the domestic price depends upon the international price times the tariff change. Taking log on both sides would linearize the relationship, For simplicity gestures, we would allow the relaxation of two strong assumptions. Firstly, there are unified products and one tariff line for imports of the same product for all countries. In this way, indeed we are relaxing the Armington assumption of differentiated products with respect to their various points of srcination or production (countries). [For simple description of The  Armington Model see J.P Lloyd and Xiao. Guang Zhang Paper in Melbourne University  Australia. http://www.ecom.unimelb.edu.au/downloads/nus_symposium/Lloyd_paper.pdf].   (1 ) (1 )2 1 2 1  P P wi wii ii i i dP t t  P P        ( )2 1 2 1  P wii ii i i dP t t  P P      2  P d wii i dP t    ln ln(1 ) d d i i t  P    
Similar documents
View more...
Search Related
We Need Your Support
Thank you for visiting our website and your interest in our free products and services. We are nonprofit website to share and download documents. To the running of this website, we need your help to support us.

Thanks to everyone for your continued support.

No, Thanks