GDP Elasticities of Export Demand : An analysis of Sweden’s export flows to Germany and other trading partners

University essay from Högskolan i Jönköping/IHH, Economics, Finance and Statistics; Högskolan i Jönköping/IHH, Economics, Finance and Statistics

Abstract:

Exports are an important source of income for Sweden. They are influenced by macroeconomic factors such as GDP. This paper examines the elasticity of Swedish export to changes in the GDP of Sweden’s 25 most important export partners. The sensitivity to changes in GDP, the elasticity, can be different for different goods. Therefore, we examine export elasticities for five different commodity groups, which include durable as well as non-durable goods. Moreover, special focus is put on the trade relationship between Sweden and Germany in order to see if their long common trade history has any impact on the elasticity of Swedish exports to Germany. The analysis is based on an export demand function that links exports to GDP and geographical distance. We include dummy variables in our regression model to control for EU-membership and common borders.    

 

For Swedish exports to Germany, we find that exports of food and live animals are least elastic, whereas exports of machinery and transport equipment are most elastic. This is coherent with previous empirical findings about demand elasticities of non-durable and durable goods. We find that exports in two out of five commodity groups are unit elastic. This means that when German GDP increases by one percent, Sweden’s export to Germany in these commodity groups also grows by approximately one percent. Thus, Sweden is not able to capture additional profit through over proportional increases in exports to Germany. For Swedish exports to its 25 most important trading partners, on average, we find that exports of manufactured goods as well as machinery and transport equipment are the least elastic exports. This gives them the lowest growth potential.

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