Errors-in-variables, supply side effects, and price elasticities in foreign trade

Previous estimates of price elasticities in foreign trade are likely to be biased upward due to errors-in-variables, omission of supply side influence s, aggregation, bad measurement of price competitiveness, and misspecificat ion of the estimation equations. This paper incorporates the supply side in to the traditional demand for export equation and uses a panel data approac h for OECD manufacturing to provide unbiased estimates of price elasticitie s. The estimates indicate that the sum of the absolute import and export pr ice elasticities is close to one and that currency depreciations are likely to adversely affect trade balances in the long run due to supply side infl uences. JEL no. E3, Fl, F4.