Development of a multi-region, multi-crop international trade sector : an armington approach within a macroeconomic context

Abstract

This study (1) conceptualized and estimated U.S. crop export relationships with major agricultural trade partners, (2) obtained estimates of trade-related substitution and price elasticity parameters generated by a multi-crop, multi-region Armington model, (3) endogenized these estimated trade relationships into the COMGEM macroeconomic model, and (4) simulated U.S. crop export responses to three hypothesized scenarios of Japanese monetary policy over the 1986-1990 period. A major goal of this study was to disaggregate COMGEM's two-region export demand equations for wheat, corn, and cotton using the Armington trade flow/market share approach to agricultural trade modeling. This approach imposes a homogeneously separable constant elasticity of substitution preference structure upon the importer. Advantages include providing a theoretical justification of the observed two-stage budget procedure and reduced information requirements of import demand estimation. It also offers certain econometric advantages, including reduced multi-collinearity. Five types of equations were modeled to capture the linkages between U.S. crop exports and U.S./non-U.S. macroeconomic, trade, and agricultural policy. These equations include, for each crop and importer, a first-stage market demand equation, the second-stage demand equation for U.S. crop supplies, a CPI equation, a real GDP equation, and a real exchange rate equation. Armington trade parameters were calculated from these econometric results for the modeled U.S. crop exports. Their values generally coincided with those generated by the few comparable and existing Armington studies. The model was validated out of sample for 1984, the latest date for which data are available. The model was then used to investigate U.S. corn and wheat export responses to Japanese monetary policy. Three alternative rates of Japanese monetary expansion were simulated within the context of a "high deficit/moderate money" U.S. macroeconomic policy. U.S. crop exports to Japan were largely unchanged by higher rates of Japanese M1 growth; purchasing power parity and Japanese economic growth acted to offset the influences from the change in the nominal yen/dollar exchange rate.