Price and Activity Effects in International Trade: Cointegration, Aggregation and Prices

This study investigates the relationship between manufactured import flows to Australia and relative prices and domestic economic activity over the phriod 1981Q3 to 1992Q2. It overcomes a number of limitations which have marred previous contributions to this literature. For the first time in the literature, we provide disaggregated import price and activity elasticities based on the Johansen FIML procedure for estimating cointegration vectors. Second, we employ actual import prices for a new disaggregated data set covering 29 import products. Third, we check for possible aggregation bias in the aggregate import demand function by computing a value-weighted aggregate elasticity adjusted by distribution factors. The results point to price elasticities that are generally lower, ranging from 0.24 to I .75. We also find evidence of upward bias in the aggregate import function.