Learning Outcome: 

You will learn how export demand is described in single-country models like the UNI-CGE model, and the role of the export demand elasticity in defining large and small countries.

Foreign Demand in a Single-Country CGE Model

Producers in single-country CGE models export some of their products to foreign markets. Because consumer demand in foreign countries is not described in the models, some assumptions must be made about how foreign demand behaves if there is a change in export prices or export supply.  

Many single-country CGE models, including the UNI-CGE model, describe foreign market demand using a simple, linear demand equation in which foreign demand can change if the home country's export price changes, as shown in Equation 1.  In the equation, the percent change in quantity of foreign demand for each exported commodity (QE_c) is a function of an elasticity parameter (ede_c) of foreign demand for commodity c  (ede has a negative sign) and the percent change in the home country's world export price of c (PWE_c):  

(1) % Change in QE_c   =  ede_c   *  % change in PWE_c

For example, if you observe an 8% fall in the home country's export price and the foreign demand elasticity is -2, then the export quantity will increase by 16% (16 = -2 * -8). The modeler's definition of the ede parameter value is an important assumption in a CGE model. The larger the absolute value of the ede parameter, the larger the change in export quantities of commodity c following a price change, and the larger the effects on the rest of the economy.   

Calculating EDE  

We can rearrange equation 1 to get a different view of the export demand elasticity. Equation 2 defines ede as the percent change in quantity of exports given a percent change in the world export price:  

(2) ede_c = % Change in QE_c / % change in PWE_c

As an example, what if you observe that a 4% fall in the export price leads to an 8% increase in the quantity of exports?  Using equation 2, you can calculate that the elasticity of foreign demand for exports is -2  ( 8% / -4% = EDE = 2).          

EDE and Large versus Small Countries

The value of the foreign demand elasticity can tell us whether the country is large or small in world markets.  If a country has a large share of a commodity in world markets, then foreign consumers have few alternative sources for their imports. There will be only small changes in foreign demand if export prices change. A large country is therefore described by a low ede value. For example, an ede parameter value of -.2 and an increase in a country's world export price of 10% would cause export demand to fall 2%.

A high EDE parameter value describes a country that is small in world markets. The intuition is that the country faces a lot of competition in its export market.  If it tries to raise its export price, its customers will readily shift to alternative sources and its export quantity will fall by a large amount. For example, an ede parameter value of -5 and an increase in its world export price of 10% would cause its export quantity to fall 50%.   

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