| In addition to the level of economic activity, the exchange rate and relative price levels are two important determinants of trade flows. Although few studies have attempted to capture the magnitude and the speed with which trade flows respond to changes in the exchange rate and price levels, they have certain shortcomings that limit their applicability and reliability. As a result, the work on this topic is unfortunately unsatisfactory and no agreed-upon decision has been reached. Therefore, this study investigates the determinants of trade flows, especially the speed with which trade flows respond to a change in the exchange rate and to a change in price levels. Moreover, this study provides new estimates of export and import demand equations of both developed and developing countries by employing autoregressive distributive lag (ARDL) approach that incorporates the time series properties of the data.; The analysis of data reveals seven main findings. First, the estimates of income elasticities are larger than the estimates of relative price and exchange rate. The estimates on the average are 1.40 for income, −1.17 for price, and −1.05 for exchange rate in export equations. In imports, the estimates are 1.35 for income, −1.14 for price, and 0.84 for exchange rate. Second, developed nations usually have higher income elasticities than developing nations, on average 1.41 and 1.36 in exports, and 1.49 and 1.30 in imports respectively. Third, the relative price and exchange rate estimates are generally less than unity, especially for developing countries. Fourth, compared to the developed countries, developing countries have larger exchange rate coefficients in the import demand function than export demand equations. Fifth, the estimates of relative prices, the exchange rate and income are smaller in the short-run than in the long-run. Sixth, exports respond more quickly to changes in exchange rate while imports respond more quickly to changes in relative prices. Finally, when lag lengths are considered, developed and developing countries' trade flows respond differently to changes in prices and exchange rate. Developed countries' exports respond faster to changes in prices, while their imports respond slower to changes in prices. On the other hand, developing countries' exports respond more quickly to changes in the exchange rate, whereas their imports respond slower to changes in the exchange rate. |
