The Impact of Changes in Real Income and the Real Effective Exchange Rate on Trade in Goods and Services

We use foreign trade data on both imports and exports of goods and services among a group of 15 advanced economies to determine the incomes and price elasticities of demand for exports and imports of goods, services and goods and services combined in the long run. We find that changes in foreign and domestic income have, as expected, a positive long-run impact on the demand for exports and imports, respectively, with the impact of income changes being typically greater on the demand for services than on the demand for goods. We also confirm that a depreciation in the real effective exchange rate leads to an increase in exports for most of the economies, while the impact on the demand for imports is mixed. Finally, we find a large degree of heterogeneity in the income and price elasticities of demand for trade in goods and services among the 15 economies.