Saudi Arabia - Trade Elasticity Essay Example | Topics and Well Written Essays - 750 words - 1

Saudi Arabia - Trade Elasticity - Essay Example Frequently, trade elasticities are needed for answering policy questions regarding a country and for making judgments regarding a country’s real exchange rate (Billmeier & Hakura, 2008). It should be noted that, trade elasticities need to be estimated with respect to foreign, domestic demand and the real exchange rate and factors such as energy prices across the world. When estimating trade elasticities, several choices must be made including long-term factors that drive export and import demand. Secondly, it is important to ascertain how the recent global trade flows are dominant in these estimates. Additionally, trade elasticities are also depended on relative prices, demand, and natural resource endowment, particularly, energy such as oil (Billmeier & Hakura, 2008). In Saudi Arabia, the elasticity of export and import demand changes with variations in foreign and domestic demand. Imports, in particular, appear to be more inelastic with regards to domestic demand. This is because demand is mostly geared towards goods that are domestically produced. Interestingly, Saudi Arabian imports are, to a much larger extent, dominated by energy imports, particularly oil. Imp orts increase by 2.2 percent when the real price of oil increases by 10 percent (Billmeier & Hakura, 2008). However, both exports and imports react in the same way to foreign demand and domestic demand, respectively. To calculate import and export elasticities for Saudi Arabia, this paper will utilize results from the production theory. Using Hotelling’s lemma, the general-equilibrium supply function can be obtained from a derivative of a country’s GDP function with regard to output prices. Demand function for inputs can also be obtained in this similar way, and as such, import elasticity can be estimated. Saudi Arabian import elasticity according to (Billmeier & Hakura, 2008) is -1.915553. This is a negative and is assumed to be with the wrong sign