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Abstract

This paper investigates the existence of long run export demand function for Bangladesh's tea and tests for three conditions of small country assumption, namely, one to one relation between export price of tea and price substitute goods in the world market, infinitely own price elasticity of export demand, and no significant effect of world income on tea export. For this purpose an inverse demand function (price dependent) is estimated using two-step Engle-Granger Procedure proposed by Engle and Granger (1987) and a third step of the Engle-Granger Procedure proposed by Engle and Yoo (1991). It has been found that there exists long-run export demand function (inverse) for Bangladesh's tea. There also exists short run Error Correction Model (ECM). The results suggest that none of the three conditions of small country assumption can be rejected. This is evident both from long run model and short run ECM. Earlier study found that price elasticity of export demand for tea is zero which suggests that Bangladesh can impose export tax on tea to maximize revenue earnings from tea exports. The finding of the present study rules out such a policy of export tax.

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