New Zealand’s price elasticity of export demand

Abstract

One of the major justifications for continuing high levels of trade policy intervention in New Zealand derives from a view that the aggregate elasticity of export demand facing New Zealand is sufficiently inelastic to warrant the imposition of an optimal export tax. In spite of a known downward bias, previous direct econometric evidence would support this view.

In this thesis, an indirect approach based on an expanded Yntema Formula is used to estimate the aggregate export demand elasticity. This procedure involves estimating the domestic market response parameters, market share weights, and price transmission elasticities in major trading countries for selected New Zealand export products, and aggregating them to the level of the current account.

The estimates derived with this alternative methodology support the hypothesis that in the medium to long run New Zealand's elasticity of export demand is very high. If these results are correct, then the current utilisation of rigid commercial policy instruments such as import tariffs, and statutory monopoly export rights, will have led to a reduction in the level of welfare that the domestic economy could otherwise expect to attain.