The Effects of Exchange Rate Changes on Trade Balance in Sudan
One of the primary economic objectives of most developing countries is to improve their trade balance. Economists have suggested that trade deficit can be reduced through currency devaluation. This study attempts to determine the effects of devaluation on the trade balance of Sudan and the pass-t...
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| Format: | Thesis |
| Language: | English English |
| Published: |
2001
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| Subjects: | |
| Online Access: | http://psasir.upm.edu.my/id/eprint/8298/1/FEP_2001_11_IR.pdf |
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| Summary: | One of the primary economic objectives of most developing countries is to improve
their trade balance. Economists have suggested that trade deficit can be reduced
through currency devaluation. This study attempts to determine the effects of
devaluation on the trade balance of Sudan and the pass-through effects on Sudan's
major export prices by employing Vector Error Correction Model (VECM).
The results from the study suggest that the elasticities of import demand with respect
to the price ratio of imports relative to domestic price and domestic income are high,
while that of the real effective exchange rate is low. The elasticities of export
demand with respect to price ratio of exports relative to foreign price, foreign income
and real effective exchange rate are high. In particular, the export demand for cotton
and gum arabic are elastic with respect to the exchange rate and the foreign price. For the trade balance, it is found that the elasticities of trade balance with respect to
domestic income, foreign income and real effective exchange rate are all elastic.
The sum of the long-run elasticities of demand of exports and imports with respect to
their respective prices is greater than one and therefore the Marshall-Lerner
condition is satisfied suggesting that devaluation could be a useful policy to improve
the balance of payments. The findings of the study also indicate that there is a
significant long-run relationship between the real effective exchange rate and trade
balance indicating that devaluation could improve the trade balance in the long-run.
The results of pass-through of the export prices of cotton is complete suggesting that
Sudan is likely to be a price-taker in international market and therefore. devaluation
of Sudanese pound will increase the demand for the export of cotton in the long-run.
The pass-through for gum arabic is incomplete suggesting that Sudan is likely to be a
price-maker in international market and the devaluation of the Sudanese pound may
have little impact on the export demand for gum arabic in the long-run. |
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