Dear Researcher
What is the justification of deviation of trend income as proxy of domestic demand pressure in export supply function. What is theoretical justification of the measurement of domestic demand pressure as trend value
rgds
irshad
Asallamoallikum Irshad,
Can you please simplify your question:
May be this can be helpful to you ......May be .....
"In the 1960s, demand conditions (Burenstam-Linder, 1961) and different technology gap theories tried to explain national trade patterns (e.g., Vernon, 1966). Although these economic theories still provide some insights into firms’ internation- alization, their focus on international trade does not give us enough information to understand firms’ development (Porter, 1990)" (Andersson, 2004).
Some Important References you may refer to are:
Burenstam-Linder, S., 1961. An Essay on Trade and Transformation. Wiley, New York.
Andersson, S. (2004). Internationalization in different industrial contexts. Journal of Business Venturing, 19(2004), 851–875.
Bakan, İ., & Doğan, İ. F. (2012). Competitiveness of The Industries Based on the Porter’s Diamond Model: An Empirical Study. IJRRAS, 11(3), 441–455.
Dear Sayed: Suppose you only have "2 series: aggregate demand" (AD) and "aggregate supply" (AS). Therefore, economists usually think about a closed economy in terms of AD-AS curves (on the usual {Y,P} axes) in terms of AS being vertical (production technology is relatively fixed at any quarter t), and AD moving whenever interest rates, public expenditures (and other AD fundamentals) change. In terms of time series, let's try to plot them on the {t,Y} axes. The argument above implies that AS moves smoothly over time (as production technology changes, say, as a linear trend) while AD moves fast around such a "trend", thus becoming the "business cycle". Therefore, the deviation from trend is a measure of excess demand (or just say it is the "demand", while the "supply" is just the constant at zero). Empirically, of course, there are many ways to "detrend" our aggregate income series (linear trend, a specific polynomial on time, Hodrick-Prescott filter, any band-pass filter, the Beverige-Nelson, etc. See section 2 in Canova 1998 "Detrending and business cycle facts", Journal of Monetary Policy, Vol 41). [As an aside, all these trends are very sensible because of the existence of "breaks" (see Perron & Wada 2005 "Trends and cycles: a new approach and explanations of some old puzzles").] Now, going back to theory, as we must think about an open economy, things become harder, because now you must somehow separate 4 series in terms of goods: "domestic demand", "external demand", "domestic supply" and "external supply" (the last one being closely related to an "export supply function"). [Note income data is not quite useful for this matter because it is actually doing a separation in terms of "entities" depending upon their being "residents" or "non-residents". For this to be clearer, I advise to review the national accounts.]
Sorry, Sayed, the first reference I just gave you is slightly wrong: it is the "Journal of Monetary Economics" (not the "Journal of Monetary Policy").
Thanks a lot Professor Carlos for valuable comments
Regards
Sayed Irshad Hussain
