Income and Price Elasticities of China's Exports

The appearance of new product varieties and improvements in the quality of goods have both played key roles in the rapid growth of China＇s exports. However, these two important elements have not been formally integrated into the demand equations for China＇s exports. As we demonstrate in this paper, income elasticity will be underestimated if new varieties of goods and quality improvements are omitted in price index and quantity index calculations, which are necessary for estimating the export demand function. Moreover, the faster new product varieties enter export markets, the greater the underestimation will be. In this paper, we develop an export demand equation that takes into account newproduct varieties and improvements in quality, and then calculate the demand function for China＇s exports using the data from 1992 to 2006. According to our estimation, the short-term income elasticity of demand for China ＂s exports is approximately 2.34, and the short-term price elasticity is approximately-0. 65. Our estimation predicts an increase in China＇s export value in the case of an RMB appreciation or export rebate rates reduction in the short term, due to the low price elasticity of China＇s exports, whose absolute value is less than 1. Our findings are novel and could have significant policy implications.