In the theory of international trade (see for the beginning https://en.wikipedia.org/wiki/International_trade ) there is Heckscher–Ohlin model, where countries are compared with factor endowments. They export goods that require resources (factors) which are relatively abundant. Typically factors are labour and capital, but I think natural resources can be added. If in one country (Equador) the cost of growing banana is very low comparing to others, it should export it. Since there exists equilibrium international price for each good (at least at stock exchanges), there is no reason to export particular good for a country with higher cost of production than this price.

Transport cost is another important variable, also it is out of HO model. I know that Samuelson was doing such models. While models of Krugman are very popular today, I have some reservation, since there are some unrealistic assumptions about transport cost there.

Input costs, typically proxied by the manufacturing wage are important for export supply functions. Have a look at Abbott & De Vita (2002) in Applied Economics, 34, 1025-1032. This paper unpacks the theory behind your question based on Riedel (1988)  modelling approach (see Economic Journal, 98, 138-48). I hope you find this useful.

Dear Yuri Yegorov

First, i am very thankful to your for your valuable explanation and i got the point.  how can we measure this cost. whether the wages per worker is the suitable proxy to measure this cost or not. if you have any idea regarding measurement of the cost variable in export supply function please share with me i am very thankful to you

Regards

Sayed Irshad Hussain

PhD Canididate (Economics)

Dear Professor Vita

First, thanks a lot for your cooperation. Sir if you mention the title of the paper i will be get  very easily

Regards

Sayed Irshad Hussain

PhD Candidate

Dear Sayed,

you should calculate all costs for one unit of export in one currency (like USD): price, cost of labor, cost of capital, cost of raw materials, cost of energy, cost of transport.

Suppose that one unit is 1 kg of bananas. You sell it at $0.5 at port, and your labor cost is $0.1, capital cost $0.05, land rent $0.04, fuel cost $0.03, transport cost (from farm to port including taxes) $0.1; the total cost is 0.1+0.05+0.04+0.03+0.1=0.32. Since 0.5-0.32 =0.18>0, you are making profit of $0.18 at each sold kg of bananas. This was just an example of accounting; you should get your own cost data for your product.

Originally you do accounting for your farm. For example, it uses work of N workers, each gets daily wage w and work M days. Then labor bill is NMw. You use some machines that cost X per year. You produce Y kg of bananas at your farm per year. Then you divide all those costs by Y and get cost per 1 kg of bananas.

Dear Sayed,

The article in question is titled: Long-Run Price and Income Elasticities of Demand for Hong Kong Exports: A Structural Cointegrating VAR Approach. You can dowload it in full text from my research gate page. There you'll find the full reference for Riedel (1988), who i understand is also on research gate.

Good luck with your research. 

Dear Yuri Yegorov

Thanks a lot for valuable suggestions

Regards

Sayed Irshad Hussain

Dear Sayed,

I wonder how one can estimate an export supply function. In general, the disposable data are on exports which are results of supply and demand. These data can be seen as export supply only if one assumes that supply is the limiting factor (which I think is not very realistic). Nevertheless wages can influence both demand and supply. E.g. higher wages could lead to a higher domestic demand for goods which would otherwise be exported. Low wages could be an incentive for international firms to shift (labor-intensive) production (for the world market) into a country and for already existing domestic firms it is cheaper to produce increasing their competitiveness. One can find - I am sure - many other reasons why wages can affect exports. But I fear that regressions may not show strong correlations between wages and exports, because the effects I mentioned above are at least medium-term. A firm which invested in a production plant because of cheap labor would not stop production next year because wages have increased. And it would not reduce production unless there is shortage of demand (from abroad). One must also not overlook that changes of wage cost in international comparison are in many cases dominated by exchange rate fluctuations.

Supply function is a kind of theoretical instrument in microeconomics. It is the volume of supply as a function of price. Given that all agents are rational and know all information. Typically issues like sunk investment are not considered (although important).

It is true that the global market does not often give us a chance of high variation of price that can be contrasted with observed supply. But this year oil market gives us this chance. I think that under rationality the supply function should shrink substantially when price dropped from $100 to $30. One reason is that some producers have total costs above price (like US shale oil; I saw cost estimate of $70 in "Economist")  - but they did not drop. Strangely, even OPEC producers do not take into account the fact that opportunity cost of not selling at $30 today could be a chance to sell at $50 in 1-2 years, or maybe at $100 in 5 years (but there is high uncertainty). Real markets also include strategic game considerations (for oil it is an ability to operate with variable cost only and to try to kick out rival even making temporal losses) and sometimes geopolitics... But for goods like banana one can probably make estimation of supply function.

Dear Yuri,

You are right that a supply function is a - useful - theoretical concept. But my point is that you cannot - or only under very special circumstances - observe supply, the export data show only the result of supply and demand. Your oil example is very good for showing this. The low oil price is mainly due to the low demand for oil in comparison to - may be - increased supply (perhaps to avoid competition from shale oil). The behaviour of the oil producers is not really strange. Firstly, they need money - not in two years, but now. Secondly, the marginal cost of producing oil are likely to be very low, whereas the fixed cost of running an oil field could be considerable. In addition, there are also strategic considerations, as you mentioned.

The non-observability problem is also true for bananas. Let us assume a bad vintage in banana producing countries. Then their export supply is restricted, prices would go up. A supply function would suggest that supply increases, but the export data would not show any increase in the traded quantity. How to estimate a supply function from these data?

Dear Anton, you might be mixing 2 issues: shock to productivity and reaction of producer on prices. Correct example would be this. Farmer produced 1 ton of bananas when the price was $0.50, and decided to produce 2 tons when the price went up to $0.70. But he still cannot produce more even if price is $1, just because he has limited land. In the first case he decided to grow more bananas at the expense of corn, for example. This is a reaction of small producer on changing environment.

What you are talking is shock to productivity (bad weather). In fact the supply is a function of price and there is coefficient of this shock - I use all my land for bananas, because high price was expected (my rational supply decision), but  had bad luck and got less bananas than expected from this area. So I cannot export more. We have those shocks mostly in agriculture. A shoe maker will react on world price change for shoes by increasing his production - and export.

Dear Yury,

It was my intention to mix different effects (issues). I do not deny the existence of a supply function (although for bananas supply adjustment to price movements can only happen with a long lag - a case of a pig cycle). What I wanted to show is that, because of the combination of different effects, export data can be and often are far from the (true) export supply function and therefore one cannot, in general, estimate this function from these data. That does not exclude that, in principle, an export function can be estimated by combining variables which influence supply and demand, although the specification of the function could be difficult.