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Article: Income elasticities and trade effects: an alternative approach.
- Article from:
- Atlantic Economic Journal
- Article date:
- June 1, 1992
- Author:
CopyrightCOPYRIGHT 1992 Atlantic Economic Society. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights should be directed to the Gale Group. (Hide copyright information)
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Bela Balassa [European Economic Integration, 19751 suggested that the trade creation and trade diversion effects of a customs union can be measured by calculating pre-pact and post-pact income elasticities of demand by the member nations. If the income elasticity of demand for imports from the partner nations increases, this is taken as evidence of internal trade creation. Also, if the income elasticities of demand from non-member nations decrease, this represents external trade diversion. If these elasticities increase, external trade creation is indicated.
However, Balassa's method rests on a very crucial and, perhaps, unrealistic assumption. For this method to ...