Pricing behaviour of selected commodities in the international market

Abstract

The objective of this thesis is to examine the pricing behaviour of selected commodities in the United States and New Zealand using the Law Of One Price as the basic model. The commodities studied are all farm inputs partly because of the importance of agriculture to the New Zealand economy but also because agricultural inputs tend to meet the criterion of being perfectly substitutable in international trade. The thesis consists of five chapters. Chapter 1 provides an introduction to the study. Chapters 2 and 3 review the factors affecting prices of internationally traded commodities present a survey of theoretical literature on pricing models and provide a critique of the main empirical studies. Chapter 4 provides a derivation of an appropriate empirical model based on the data used in the thesis, a report on estimation, results and a discussion of the results. The empirical work is broken into two parts. Results of estimates indicated that movements in aggregate price indices are similar between the United States and New Zealand. Initial estimation using data for individual commodities produced poor results. Respecification of the model using a variant of partial adjustment improved results markedly. Overall, the results indicate some support for the Law Of One Price in the long-run, but not in the short-run. The main reason for this result is existence of price rigidities. The nature of these rigidities is analysed.