A simultaneous econometric model of world vegetable trade

MISSING IMAGE

Material Information

Title:
A simultaneous econometric model of world vegetable trade implications for market development
Physical Description:
xviii, 492 leaves : ill. ; 28 cm.
Language:
English
Creator:
Sparks, Amy Larsen, 1957-
Publication Date:

Subjects

Subjects / Keywords:
Vegetable trade -- Econometric models   ( lcsh )
Econometric models   ( lcsh )
Genre:
bibliography   ( marcgt )
theses   ( marcgt )
non-fiction   ( marcgt )

Notes

Thesis:
Thesis (Ph. D.)--University of Florida, 1987.
Bibliography:
Includes bibliographical references (leaves 486-491).
Statement of Responsibility:
by Amy Larsen Sparks.
General Note:
Typescript.
General Note:
Vita.

Record Information

Source Institution:
University of Florida
Rights Management:
All applicable rights reserved by the source institution and holding location.
Resource Identifier:
aleph - 000979083
notis - AEV4946
oclc - 17497216
System ID:
AA00003798:00001

Full Text












A SIMULTANEOUS ECONOMETRIC MODEL OF WORLD VEGETABLE
TRADE: IMPLICATIONS FOR MARKET DEVELOPMENT











By

AMY LARSEN SPARKS


A DISSERTATION PRESENTED TO THE GRADUATE SCHOOL
OF THE UNIVERSITY OF FLORIDA IN
PARTIAL FULFILLMENT OF THE REQUIREMENTS
FOR THE DEGREE OF DOCTOR OF PHILOSOPHY


UNIVERSITY OF FLORIDA


1987
















ACKNOWLEDGEMENTS


Many people have been kind and helpful to me in the

process of producing this dissertation, and I thank them all

very much. I would, however, like to give particular thanks

to a few individuals without whose help the project would

have been much more difficult.

Emelie Matthews deserves an award for her help in

typing the tables and generally helping me put the

dissertation in its final form for submission to the

graduate school. Jim Parks and Vicki Turner, outreach

personnel with NERDC at the University of Florida, were very

helpful in clarifying the logic of script and therefore

allowing me to use NERDC to edit and print my dissertation.

Also, all of the computer support staff in the Food and

Resource Economics Department were very helpful and I thank

them.

The staff of the reference and documents departments of

Library West of U.F. were extremely helpful in obtaining the

data and documentation I needed to do this study. I thank

them all very much. Ray Jones, in particular, spent a great

deal of time and energy in my behalf and I am indebted to

him.












I also appreciate the funding I received from the Food

and Resource Economics Department. Without this financial

support it would not have been possible for me to study at

the Ph.D. level.

I would like to thank my supervisor at the United

Nations, Fred Campano, for his suggestions and comments on

my dissertation. Many of these were incorporated into the

body of the work.

My professors at the University of Florida have been

very helpful. My committee, Drs. Leonard Cheng, Richard

Kilmer, and Clyde Kiker made many helpful suggestions. Dr.

James Seale gave some very insightful and useful comments.

Drs. William Boggess and Max Langham also made helpful

comments. I greatly appreciate all of their comments and

suggestions.

Dr. Ronald Ward, the chairperson of the committee

worked very hard to help me pull this project together. I

thank him very much for his time and effort. I learned a

great deal from working with him.

On a more personal level, I would like to thank Drs.

Langham and Boggess for their support and encouragement

throughout my studies in FRED. Dr. Clyde Kiker deserves his

weight in gold for all the support and guidance he has given

me over the years.


iii











Finally, I would like to thank my mother for her moral

support and understanding. Having the example of a strong,

active, and accomplished mother has made all the difference

in my life.


















TABLE OF CONTENTS


Page


ACKNOWLEDGEMENTS . .

LIST OF TABLES . .

LIST OF FIGURES . .

ABSTRACT . . .


. ii


viii

xiv

xvii


CHAPTERS


I IMPORTANCE AND CHARACTERISTICS OF
INTERNATIONAL TRADE . .

Introduction. . .
National Agricultural and Trade Policies.
The Nature of Competition in Agricultural
Trade . . .
Importance of Vegetable Trade ..
Problem Statement .....
Scope . . .
Methodology . .
Overview . .


S. 6
. 9
. 12
. 18
. 18
. 21


II CHARACTERISTICS OF TRADE AND PRODUCTION OF
FRESH VEGETABLES WORLD-WIDE . 23

Introduction . 23
Levels, Percentages, and Growth of Production 25
Levels, Percentages, and Growth of Trade. 25
Patterns of Trade. . ... 35
Conclusion. . .. 43

III LITERATURE REVIEW . .. 46

Introduction . .. 46
World Trade Model Approach. 46
Direct Application of Econometric Techniques. 56
Present Study . ... .59











IV THEORETICAL TRADE MODEL FOR FRESH VEGETABLES

Introduction . .
Theoretical Basis of Model . .
Generalized Trade System.. .
Specific Functional Representation .
Implications . .

V ECONOMETRIC ISSUES . .

Introduction . .
Trade Model in Matrix Algebra. .
Methods of Estimating Nonlinear Simultaneous
Systems . . ..
Determining Identifiability of Equations in
Simultaneous Systems . .
Identifiability of Equations in the System
for World Vegetable Trade. .
Statistical Analysis System (SAS)
Estimation of Nonlinear Simultaneous
Systems. . .
Data Sets. . .
Summary. . . .


Page

63

63
65
70
81
88

90

90
91

98

101

102


104
107
116


VI RESULTS OF ECONOMETRIC ESTIMATION. 119

Introduction .... . 119
Graphs of Selected Relationships 122
Statistics Indicating the Fit and
Performance of the Model . 173
Conclusion . . 221

VII RELATION OF ESTIMATION RESULTS TO WORLD
TRADE PATTERNS . .. 223

Introduction ...... .. 223
Estimation Results with Respect to Latin
America . 224


Estimation Results with Respect to Canada .
Estimation Results with Respect to the
Middle East .. .... .
Estimation Results with Respect to Afica.
Estimation Results with Respect to the Non-
E.E.C. Western European Region .
Estimation Results with Respect to the Far
East .. . .
Estimation Results with Respect to the
European Economic Community. .
Estimation Results with Respect to the
United States. . .
Summary. . . .


235

242
254

262

270

276

282
290









Page


VIII SIMULATION RESULTS AND THEIR IMPLICATIONS
FOR WORLD VEGETABLE TRADE . 292

Introduction . 292
Market Demands . .. 294
Product Demands . 306
CIF Import Prices . 356
Export Supplies. . .... 366
Conclusion . . 380

IX CONCLUSIONS OF THE STUDY .. .. 381

Introduction . ... .. 381
Contributions of this Study to Agricultural
Economics Research . .. 383
Difficulties in Implementation .. 387
Performance of the Trade Model as Revealed
by Econometric Results .. 390
Observed Trends in Trade and Implications
of Econometric Results for These Trends. 394
Implications of Simulation Results .. 395
Drawbacks and Limitations of the Study 403
Summary. . ... .. 407

APPENDICES

A REGIONAL COMPOSITIONS BY COUNTRY AND UNITED
NATIONS COUNTRY CODES. .. 413

B IMPORTS AND EXPORTS BY REGION AND YEAR 419

C LEVELS AND PATTERNS OF TRADE FOR SELECTED
YEARS . . 424

D DERIVATION OF THE PRODUCT DEMAND FUNCTIONAL
FORM FROM THE CRES MARKET DEMAND 439

E TARIFF LEVELS USED IN THE TRADE MODEL. 442

F PRINCIPAL COMPONENT ANALYSIS . 444

G COMPUTER PROGRAM FOR ESTIMATING THE WORLD
TRADE SYSTEM FOR FRESH VEGETABLES 449

H COMPUTER PROGRAM FOR ALL SIMULATIONS .. 463

LIST OF REFERENCES ... 486

BIOGRAPHICAL SKETCH. .. 492


vii















LIST OF TABLES


Table Page

1.1 IMPORT AND EXPORT QUANTITIES BY REGION, 1962
AND 1982. . . 11

1.2 COMPOSITION OF TOTAL U.S. EXPORTS OF SITC
CODE 054. . .. 13

1.3 COMPOSITION OF U.S. EXPORTS TO CANADA 14

1.4 COMPOSITION OF U.S. EXPORTS TO THE UNITED
KINGDOM . ........ 15

1.5 COMPOSITION OF CANADA'S EXPORTS TO THE U.S. 16

2.1 LEVELS, PERCENTAGES AND GROWTH OF PRODUCTION
OF FRESH VEGETABLES, 1962 TO 1982 26

2.2 LEVELS OF GROWTH OF INTERREGIONAL IMPORT
QUANTITIES, 1962 TO 1982 ... 27

2.3 LEVELS AND GROWTH OF INTERREGIONAL EXPORT
QUANTITIES, 1962 TO 1982 . .. 28

2.4 LEVELS AND GROWTH OF INTRAREGIONAL IMPORT
QUANTITIES, 1962 TO 1982. . ... 29

5.1 COMPOSITION OF F (i), THE MATRIX OF PARAMETERS
ON THE LOG TRANSFORMED ENDOGENOUS VARIABLES
FOR REGION i . . 95

6.1 MARKET DEMAND EQUATIONS FOR ALL REGIONS 174

6.2 EXPORT SUPPLY EQUATIONS FOR ALL REGIONS 175

6.3 DURBIN WATSON AND R2 STATISTICS FOR ALL
PRODUCT DEMANDS . 176

6.4 % RMS AND THEIL INEQUALITY COEFFICIENTS FOR
ALL PRODUCT DEMANDS . ... 177

6.5 DURBIN WATSON AND R2 STATISTICS FOR ALL CIF
PRODUCT PRICES. . 181


viii









Page

6.6 % RMS AND THEIL INEQUALITY COEFFICIENTS FOR
ALL CIF PRODUCT PRICES .. 182

6.7 MARKET DEMAND PARAMETERS AND t-STATISTICS
FOR ALL REGIONS . .. 188

6.8 PRODUCT DEMAND PARAMETERS AND t-STATISTICS
FOR ALL REGIONS ... .... 197

6.9 CIF PRODUCT PRICE PARAMETERS AND t-STATISTICS
FOR ALL REGIONS ... . 211

6.10 EXPORT SUPPLY PARAMETERS AND t-STATISTICS FOR
ALL REGIONS .... . ... 218

7.1 PRODUCT DEMAND PARAMETERS AND t STATISTICS
OF ALL REGIONS FOR LATIN AMERCIAN FRESH
VEGETABLES. . ... .. 226

7.2 CIF PRODUCT PRICE PARAMETERS AND t STATISTICS
OF ALL REGIONS FOR LATIN AMERICAN FRESH
VEGETABLES. . ... 228

7.3 PRODUCT DEMAND PARAMETERS AND t STATISTICS
OF ALL REGIONS FOR CANADIAN FRESH VEGETABLES. 237

7.4 CIF PRODUCT PRICE PARAMETERS AND t STATISTICS
OF ALL REGIONS FOR CANADIAN FRESH VEGETABLES. 240

7.5 PRODUCT DEMAND PARAMETERS AND t STATISTICS
OF ALL REGIONS FOR MIDDLE EASTERN FRESH
VEGETABLES. . . 244

7.6 CIF PRODUCT PRICE PARAMETERS AND t STATISTICS
OF ALL REGIONS FOR MIDDLE EASTERN FRESH
VEGETABLES. . . 246

7.7 PRODUCT DEMAND PARAMETERS AND t STATISTICS
OF ALL REGIONS FOR AFRICAN FRESH VEGETABLES 257

7.8 CIF PRODUCT PRICE PARAMETERS AND t STATISTICS
OF ALL REGIONS FOR AFRICAN FRESH VEGETABLES 258

7.9 PRODUCT DEMAND PARAMETERS AND t STATISTICS
OF ALL REGIONS FOR NON-E.E.C. W. EUROPEAN
FRESH VEGETABLES. . .. 265

7.10 CIF PRODUCT PRICE PARAMETERS AND t STATISTICS
OF ALL REGIONS FOR NON-E.E.C. W. EUROPEAN
FRESH VEGETABLES. . 267









Page

7.11 PRODUCT DEMAND PARAMETERS AND t STATISTICS OF
ALL REGIONS FOR FAR EASTERN FRESH VEGETABLES. 272

7.12 CIF PRODUCT PRICE PARAMETERS AND t STATISTICS
OF ALL REGIONS FOR FAR EASTERN FRESH
VEGETABLES. . .. 273

7.13 PRODUCT DEMAND PARAMETERS AND t STATISTICS
OF ALL REGIONS FOR E.E.C. FRESH VEGETABLES. 278

7.14 CIF PRODUCT PRICE PARAMETERS AND t STATISTICS
OF ALL REGIONS FOR E.E.C. FRESH VEGETABLES. 280

7.15 PRODUCT DEMAND PARAMETERS AND t STATISTICS
OF ALL REGIONS FOR U.S. FRESH VEGETABLES. 285

7.16 CIF PRODUCT PRICE PARAMETERS AND t STATISTICS
OF ALL REGIONS FOR U.S. FRESH VEGETABLES. 286

8.1 INDICES OF MARKET DEMANDS WITH VARYING
AVERAGE MARKET PRICES . 297

8.2 GDP AND POPULATION SIMULATIONS 299

8.3 INDICES OF MARKET DEMANDS WITH VARYING GDP
AND POPULATION LEVELS . 301

8.4 INDICES OF LATIN AMERICAN PRODUCT DEMANDS
WITH VARYING AVERAGE MARKET PRICES .. 310

8.5 INDICES OF LATIN AMERICAN PRODUCT DEMANDS
WITH VARYING GDP AND POPULATION LEVELS. 312

8.6 INDICES OF U.S. PRODUCT DEMANDS WITH VARYING
AVERAGE MARKET PRICES . .. 314

8.7 INDICES OF U.S. PRODUCT DEMANDS WITH VARYING
GDP AND POPULATION LEVELS . .. 316

8.8 INDICES OF CANADIAN PRODUCT DEMANDS WITH
VARYING AVERAGE MARKET PRICES .. 318

8.9 INDICES OF CANADIAN PRODUCT DEMANDS WITH
VARYING GDP AND POPULATION LEVELS 319

8.10 INDICES OF E.E.C. PRODUCT DEMANDS WITH
VARYING AVERAGE MARKET PRICES .. 321

8.11 INDICES OF E.E.C. PRODUCT DEMANDS WITH
VARYING GDP AND POPULATION LEVELS .. 323









Page


8.12 INDICES OF MIDDLE EASTERN PRODUCT DEMANDS
WITH VARYING AVERAGE MARKET PRICES 325

8.13 INDICES OF MIDDLE EASTERN PRODUCT DEMANDS
WITH VARYING GDP AND POPULATION LEVELS. 327

8.14 INDICES OF FAR EASTERN PRODUCT DEMANDS WITH
VARYING AVERAGE MARKET PRICES . 329

8.15 INDICES OF FAR EASTERN PRODUCT DEMANDS WITH
VARYING GDP AND POPULATION LEVELS 331

8.16 INDICES OF AFRICAN PRODUCT DEMANDS WITH
VARYING AVERAGE MARKET PRICES . 333

8.17 INDICES OF AFRICAN PRODUCT DEMANDS WITH
VARYING GDP AND POPULATION LEVELS .. 335

8.18 INDICES OF NON-E.E.C. W. EUROPEAN PRODUCT
DEMANDS WITH VARYING AVERAGE MARKET PRICES 337

8.19 INDICES OF NON-E.E.C. W. EUROPEAN PRODUCT
DEMANDS WITH VARYING GDP AND POPULATION
LEVELS. .... . 339

8.20 INDICES OF LATIN AMERICAN PRODUCT DEMANDS
WITH VARYING PRODUCT PRICES . 341

8.21 INDICES OF U.S. PRODUCT DEMANDS WITH VARYING
PRODUCT PRICES. . .. 343

8.22 INDICES OF CANADIAN PRODUCT DEMANDS WITH
VARYING PRODUCT PRICES. ... .. 345

8.23 INDICES OF E.E.C. PRODUCT DEMANDS WITH
VARYING PRODUCT PRICES. 347

8.24 INDICES OF MIDDLE EASTERN PRODUCT DEMANDS WITH
VARYING PRODUCT PRICES. . 349

8.25 INDICES OF FAR EASTERN PRODUCT DEMANDS WITH
VARYING PRODUCT PRICES. ... 351

8.26 INDICES OF AFRICAN PRODUCT DEMANDS WITH
VARYING PRODUCT PRICES. . 353

8.27 INDICES OF NON-E.E.C. W. EUROPEAN PRODUCT
DEMANDS WITH VARYING PRODUCT PRICES 355

8.28 INDICES OF LATIN AMERICAN CIF PRODUCT PRICES
WITH VARYING YEARS. . .. 358









Page

8.29 INDICES OF U.S. CIF PRODUCT PRICES WITH
VARYING YEARS . 359

8.30 INDICES OF CANADIAN CIF PRODUCT PRICES WITH
VARYING YEARS. . 360

8.31 INDICES OF E.E.C. CIF PRODUCT PRICES WITH
VARYING YEARS .. . 361

8.32 INDICES OF MIDDLE EASTERN CIF PRODUCT PRICES
WITH VARYING YEARS. ... .. 362

8.33 INDICES OF FAR EASTERN CIF PRODUCT PRICES
WITH VARYING YEARS. .. ... 363

8.34 INDICES OF AFRICAN CIF PRODUCT PRICES WITH
VARYING YEARS . . 364

8.35 INDICES OF NON-E.E.C. W. EUROPEAN PRODUCT
PRICES WITH VARYING YEARS ... 365

8.36 INDICES OF EXPORT SUPPLIES WITH VARYING
AVERAGE EXPORT PRICES . ... 369

8.37 1982 REGIONAL EXPORT SHARES .. 370

8.38 REGIONAL EXPORT SHARES WITH VARYING AVERAGE
EXPORT PRICES . 372

8.39 INDICES OF EXPORT SUPPLIES WITH VARYING
PRODUCTION LEVELS . .... 373

8.40 REGIONAL EXPORT SHARES WITH VARYING
PRODUCTION LEVELS .. 375

8.41 REGIONAL EXPORT SHARES WITH VARYING AVERAGE
EXPORT PRICES AND PRODUCTION LEVELS ... 377

B.1 IMPORTS BY REGION AND YEAR. . 420

B.2 EXPORTS BY REGION AND YEAR. ... 422

C.1 IMPORTS BY REGION AND PARTNER REGION, YEAR =
1962. . .. 425

C.2 IMPORTS BY REGION AND PARTNER REGION, YEAR =
1967. . ..... 426

C.3 IMPORTS BY REGION AND PARTNER REGION, YEAR =
1972. . .. .. 427

xii











C.4


C.5


C.6


C.7


C.8


C.9


C.10


C.11


C.12


C.13


C.14


F.1


xiii


IMPORTS BY REGION AND PARTNER REGION,
1973. . .

IMPORTS BY REGION AND PARTNER REGION,
1980. . .

IMPORTS BY REGION AND PARTNER REGION,
1981 . .

IMPORTS BY REGION AND PARTNER REGION,
1982 . .

EXPORTS BY REGION AND PARTNER REGION,
1962. . .

EXPORTS BY REGION AND PARTNER REGION,
1967. . .

EXPORTS BY REGION AND PARTNER REGION,
1972. . .

EXPORTS BY REGION AND PARTNER REGION,
1973 . .

EXPORTS BY REGION AND PARTNER REGION,
1980 . .

EXPORTS BY REGION AND PARTNER REGION,
1981 . .

EXPORTS BY REGION AND PARTNER REGION,
1982. . .

PRINCIPAL COMPONENT ANALYSIS .


YEAR =


YEAR =


YEAR =


YEAR =


YEAR =


YEAR =


YEAR =


YEAR =


YEAR =


YEAR =


YEAR =
* .

. .


Page


428


429


430


431


432


433


434


435


436


437


438

445
















LIST OF FIGURES


Figure Page

4.1 SCHEMATIC REPRESENTATION OF WORLD TRADE
SYSTEM FOR FRESH VEGETABLES. ... 71

6.1 THE MARKET DEMAND FOR FRESH VEGETABLES
IN LATIN AMERICA . .. 125

6.2 THE MARKET DEMAND FOR FRESH VEGETABLES
IN THE U.S. . 126

6.3 THE MARKET DEMAND FOR FRESH VEGETABLES
IN CANADA. . . 127

6.4 THE MARKET DEMAND FOR FRESH VEGETABLES
IN THE E.E.C. . ... 128

6.5 THE MARKET DEMAND FOR FRESH VEGETABLES
IN THE MIDDLE EAST . 129

6.6 THE MARKET DEMAND FOR FRESH VEGETABLES
IN THE FAR EAST . .. 130

6.7 THE MARKET DEMAND FOR FRESH VEGETABLES
IN AFRICA . .. 131

6.8 THE MARKET DEMAND FOR FRESH VEGETABLES
IN NON-E.E.C. W. EUROPE .. 132

6.9 TOTAL EXPORTS OF FRESH VEGETABLES FROM
LATIN AMERICA .. .. 133

6.10 TOTAL EXPORTS OF FRESH VEGETABLES FROM
THE U.S. .. . 134

6.11 TOTAL EXPORTS OF FRESH VEGETABLES FROM
CANADA. . .. 135

6.12 TOTAL EXPORTS OF FRESH VEGETABLES FROM
THE E.E.C. . ... 136

6.13 TOTAL EXPORTS OF FRESH VEGETABLES FROM
THE MIDDLE EAST . ... 137


xiv










Page
6.14 TOTAL EXPORTS OF FRESH VEGETABLES FROM
THE FAR EAST . 138

6.15 TOTAL EXPORTS OF FRESH VEGETABLES FROM
AFRICA. . . 139

6.16 TOTAL EXPORTS OF FRESH VEGETABLES FROM
NON-E.E.C. W. EUROPE . 140

6.17 LATIN AMERICAN DEMAND FOR CANADIAN FRESH
VEGETABLES . ... 143

6.18 LATIN AMERICAN DEMAND FOR E.E.C. FRESH
VEGETABLES ... . ... 144

6.19 U.S. DEMAND FOR LATIN AMERICAN FRESH
VEGETABLES. .. . 145

6.20 U.S. DEMAND FOR E.E.C. FRESH VEGETABLES 146

6.21 CANADIAN DEMAND FOR LATIN AMERICAN FRESH
VEGETABLES. ... . .. 147

6.22 CANADIAN DEMAND FOR U.S. FRESH VEGETABLES 148

6.23 CANADIAN DEMAND FOR NON-E.E.C. W. EUROPEAN
FRESH VEGETABLES. . 149

6.24 E.E.C. DEMAND FOR LATIN AMERICAN FRESH
VEGETABLES . ... 151

6.25 E.E.C. DEMAND FOR U.S. FRESH VEGETABLES 152

6.26 E.E.C. DEMAND FOR CANADIAN FRESH
VEGETABLES .. .. 153

6.27 E.E.C. DEMAND FOR FAR EASTERN FRESH
VEGETABLES . . 154

6.28 E.E.C. DEMAND FOR AFRICAN FRESH VEGETABLES 155

6.29 E.E.C. DEMAND FOR NON-E.E.C. W. EUROPEAN
FRESH VEGETABLES . ... 156

6.30 MIDDLE EASTERN DEMAND FOR U.S. FRESH
VEGETABLES . .. 157










Page
6.31 MIDDLE EASTERN DEMAND FOR E.E.C. FRESH
VEGETABLES . .. 158

6.32 MIDDLE EASTERN DEMAND FOR AFRICAN FRESH
VEGETABLES . . 159

6.33 MIDDLE EASTERN DEMAND FOR NON-E.E.C.
W. EUROPEAN FRESH VEGETABLES 160

6.34 FAR EASTERN DEMAND FOR U.S. FRESH
VEGETABLES . ... 162

6.35 FAR EASTERN DEMAND FOR E.E.C. FRESH
VEGETABLES. .. . 163

6.36 FAR EASTERN DEMAND FOR MIDDLE EASTERN
FRESH VEGETABLES. ... ... 164

6.37 AFRICAN DEMAND FOR E.E.C. FRESH VEGETABLES 165

6.38 AFRICAN DEMAND FOR MIDDLE EASTERN FRESH
VEGETABLES . .. 166

6.39 NON-E.E.C. W. EUROPEAN DEMAND FOR LATIN
AMERICAN FRESH VEGETABLES .. 167

6.40 NON-E.E.C. W. EUROPEAN DEMAND FOR U.S.
FRESH VEGETABLES . 168

6.41 NON-E.E.C. W. EUROPEAN DEMAND FOR CANADIAN
FRESH VEGETABLES. . .. 169

6.42 NON-E.E.C. W. EUROPEAN DEMAND FOR E.E.C.
FRESH VEGETABLES .. ... 170

6.43 NON-E.E.C. W. EUROPEAN DEMAND FOR MIDDLE
EASTERN FRESH VEGETABLES . 171

6.44 NON-E.E.C. W. EUROPEAN DEMAND FOR AFRICAN
FRESH VEGETABLES . 172


xvi
















Abstract of Dissertation Presented to the
Graduate School of the University of Florida in
Partial Fulfillment of the Requirements
for the Degree of Doctor of Philosophy


A SIMULTANEOUS ECONOMETRIC MODEL OF WORLD VEGETABLE
TRADE: IMPLICATIONS FOR MARKET DEVELOPMENT


By

Amy Larsen Sparks

August, 1987

Chairman: Dr. Ronald W. Ward
Major Department: Food and Resource Economics

In this dissertation a simultaneous econometric model

of world fresh vegetable trade is constructed and estimated.

The parameter estimates are then used to simulate the

impacts on levels and patterns of trade with changes in key

variables in the system. The theoretical basis of the model

is Armington's theory of demand as distinguished by place of

production. Flexibility in the substitution characteristics

of the products is allowed through use of the constant ratio

of substitution, CRES, functional form. The system is

estimated with two stage least squares, using principal

components as instrumental variables.

Statistical results and graphic comparisons of actual

and predicted trade quantities indicate that the model does

a good job in capturing the economic forces driving


xvii











international fresh vegetable trade. The Durbin Watson

statistics are usually close to two, indicating little

serial correlation and a well specified model. R square

statistics, error sums of squares, and Theil inequality

coefficients indicate that some of the functional

relationships of the model do a better job in capturing the

variation and turning points in the dependent variables than

do others. Overall, however, the model's performance is

quite good.

Trade in fresh vegetables generally occurs within two

blocs of the world, the Americas and Western Europe, Asia,

and Africa. The largest individual market is the European

Economic Community. Parameter estimates indicate that the

primary determinant of market shares in the E.E.C. is price

competition. This is clear evidence that the Common

Agricultural Policy of the E.E.C. has hindered growth of

U.S., Latin American, and Canadian exports, as many nations

in the Middle East and Africa receive preferential treatment

by the E.E.C. while these three do not. However, the

growing strength of the Middle East, Far East, and Africa as

import markets may facilitate change in the nearly dual bloc

nature of vegetable trade and give the American regions,

particularly the U.S., a chance to expand their

participation in this trade. Parameter estimates indicate

that all three American regions are strong competitors in

these markets.


xviii
















CHAPTER I


IMPORTANCE AND CHARACTERISTICS OF INTERNATIONAL TRADE


Introduction


International trade is an important part of the world

economy; national economies do not exist in isolation.

Trade is an integral part of virtually all nations' economic

activities and essentially all national economies are

interconnected through trade. The state of a nation's

economy and its policies regarding trade will have a large

influence on who it trades with and will affect the

economies of its trading partners. The more developed,

stronger economies of the Western industrialized world, in

particular, have major effects on international trade. The

trade patterns which, occur are greatly influenced by the

prevailing economic conditions of the major traders;

exchange rates, national incomes, and policies affecting

trade.

Trade in agricultural products is an important

component of international trade. Virtually all major

producers of agricultural commodities export some portion of

their production. Export markets for agricultural

commodities are often an important source of foreign









2

exchange and play a vital role in maintaining a favorable

balance of trade for producers.


National Agricultural and Trade Policies


In a market where there are no impediments to trade

implemented by humans or their institutions, market forces

interacting with world economic conditions will determine

prices, quantities, and characteristics of the products

sold. In such an economic environment, producers and

consumers interact to determine prices and quantities.

There are no restrictions on product characteristics, and

consumers are free to choose those characteristics they find

desirable. Trade in this type of market, a free market, is

thought to be governed by the principle of comparative

advantage. Those countries which can produce a good at a

lower cost relative to other nations will export that good,

while nations which can only produce it at a relatively high

cost will import the good.

In nearly all agricultural commodities, free trade does

not exist. Individual nations, or groups of nations, pursue

domestic agricultural and trade policies which alter the

workings of the market place. Indeed, the primary purpose

of these policies is to protect domestic farmers from the

vicissitudes of the world market. This is done primarily

through subsidizing production, restricting imports, either

through tariff or non-tariff barriers, and subsidizing

exports.









3

There have been efforts to move towards free trade in

agriculture, especially since World War II. The U.S. has

been a strong promoter of these efforts, espousing the

philosophy that free trade will benefit all nations. The

General Agreement of Tariffs and Trade, GATT, was the first

major result of these efforts. GATT contains provisions

regarding specific trade barriers and lays out a code of

behavior in international trade. A general rule of GATT is

that the only legitimate trade barriers are import and

export duties; however, it does contain exceptions to this

rule. These exceptions were included largely at the request

of the U.S. in order to permit domestic agricultural

policies to be pursued without significant interference from

international trade.

The actions of the U.S., promoting GATT and then

insisting on provisions to secure the rights of governments

to pursue their own domestic agricultural policies,

illustrate the major conflict in agricultural trade. While

aware that, according to economic theory, free trade allows

for the most efficient distribution of resources, expansion

of world production possibilities and the attainment of a

higher level of welfare for the people of the world,

national governments have strong political and economic

incentive to retain control over their domestic agricultural

policies. They then use this control to pursue policies to

protect their farmers from the fluctuations of the world









4

market. Once this occurs, and it is the norm, free trade in

agricultural products does not exist. While the U.S.

generally proclaims the desirability of free trade, it too

finds it necessary to adopt protectionist domestic policies.

These policies have prevented the U.S. farm sector from

having to undergo the painful readjustments which would be

necessary if it were completely open to the world market.

The European Economic Community, E.E.C., a major

agricultural trader, has one of the most protectionist

domestic agricultural programs in the world with its Common

Agricultural Policy, CAP. 1 The main purpose of the CAP is

to maintain a stable internal farming environment and

therefore protect E.E.C. farmers from world price

fluctuations in agricultural commodities. This then

insulates the farmers of the community from having to adjust

to world demand and supply conditions and forces nations

with more open agricultural trade policies to accept a

larger share of the necessary adjustment. Thus by

maintaining price stability within the E.E.C., the CAP

forces nations attempting to maintain some semblance of free

trade in agriculture to accept more price instability. This

requires greater adjustment on the part of their farming

sector than would be the case if the CAP was based on the

concept of free trade (Fraser, 1975; Fact File,1982;

--------------------

1. The original members of the E.E.C. were Germany, Belgium-
Luxembourg, France, Italy, and the Netherlands. In 1973 it
was expanded to include the United Kingdom, Denmark, and
Ireland. In 1981 Greece became a member.











Hathaway,1979).

So far, only tariff barriers to trade have been

discussed here. However, non-tariff barriers are also

formidable obstacles to free trade in agricultural

commodities. Some major non-tariff barriers include

restrictions on the types of pesticides used, packaging and

processing restrictions, seasonal quotas to protect domestic

growers, and size and quality requirements. All of these

can be and are used to restrict agricultural imports.

Progress in eliminating trade barriers, tariff and non-

tariff, is a major factor affecting trade in agricultural

products. Given the conflict between domestic agricultural

interests and global economic interests, progress in trade

barrier reduction is slow. While trade in manufactured

goods has, until recently, become freer of restrictions

since World War II, trade in agricultural commodities has,

if anything, become more protectionist. The Kennedy Round

made very little progress in reducing agricultural trade

barriers due to the early stage of development of the E.E.C.

and the E.E.C.'s insistence that agricultural commodities be

considered separately from manufactured goods. The U.S.'s

stated position is that in future negotiations, agricultural

and manufactured goods will be jointly negotiated and

covered by the same agreements.

In sum, protectionist policies have and continue to aid

the farm sectors of the nations pursuing them. While this









6

potentially results in global misallocation of resources to

the detriment of the global economy, it also works to

mitigate internal farm sector instability. This is

domestically both politically and economically desirable.

To the extent bf the political involvement and power of the

farm sector in domestic politics, it may be politically

expedient for politicians wishing to obtain or retain

national leadership to continue protectionist policies.


The Nature of Competition in Agricultural Trade


Besides following protectionist domestic agricultural

and trade policies, nations also seek out new markets and

new ways of obtaining or maintaining a competitive edge for

their goods. According to economic theory, nations will

produce those goods in whose production they have a

comparative advantage, then trade for goods in which they do

not. In the real world, however, that simple theory is not

always borne out. Having a comparative advantage in the

production of a good does not necessarily mean a nation will

be the most competitive in the good's world market. There

are policies and programs that can be and are pursued to

enhance the competitiveness of a nation's products such that

a comparative disadvantage in production can be overcome.

The E.E.C.'s CAP is very active in this respect. By

subsidizing both production and exports, the E.E.C.

effectively lowers the price on the world market for its









7

agricultural products, thus increasing their

competitiveness. The E.E.C. also protects its farmers from

imports of goods whose world prices may be lower than the

reference prices agreed upon for E.E.C. agricultural

products. It does this by charging importers a variable

levy, with the amount being the difference between the

E.E.C. reference price and the world price. Thus all

imports into the community are forced to be sold at a price

at least as high as the reference prices for the

corresponding E.E.C. products.

The U.S. also actively pursues policies to increase the

competitiveness of its agricultural products. PL-480 has

been a highly successful program in that regard. Designed

to provide foreign assistance, it has also greatly

facilitated market development, with many of its past

recipients currently major purchasers of U.S. farm

products. The grain market, in particular, has been

expanded by this program (Chambliss, 1982).

The Foreign Agricultural Service, FAS, is another

program which promotes U.S. agricultural exports. It

maintains eleven trade offices around the world with a

variety of functions, all geared to promote U.S. exports.

The FAS officers establish and maintain working

relationships with business, industry, and government

leaders in their area, create opportunities for U.S.

products to be sampled using trade shows and other marketing









8

events, and help U.S. exporters and foreign importers come

to mutually beneficial credit arrangements. The officers

attempt to understand their area's markets so that they can

be more easily penetrated by U.S. exporters (Henke,1983).

Export credits are a market development tool used by

most major exporters. These programs provide attractive

repayment and interest terms and are used as a method of

increasing an exporter's competitiveness. Suppliers are

chosen not just on price, quality or transportation, but

also on repayment plan periods and interest charges

(Tracy,1982).

The U.S. has two forms of export credit, concessional

sales and commercial sales. Low income countries benefit

from long term concessional credit while middle income

countries participate in the commercial credit sales,

GSM-102. GSM-102 is handled by the USDA's Commodity Credit

Corporation, CCC. The CCC finances an exporter if the

commodity in question will further the CCC's long range

objectives for market development. This covers sales of

virtually all major commodities (Tracy,1982; McElvain,1982).

Transport and shipping is an aspect of trade that can

yield one exporter a competitive edge over another. Major

factors include costs of shipping, time requirements from

port to port, and quality of transport so as to preserve and

protect the product. Technological advances in shipping can

lower costs and thereby increase profits and









9

competitiveness. New markets can be developed and time

requirements shortened as a result of improvements in

carriers and port and terminal facilities (Baker,1978).

Clearly, many factors interact to determine the flow of

products between countries. While prices are the allocating

mechanism, national governments pursue policies to enhance

the competitiveness of their products, often overcoming a

comparative disadvantage in production. Governments also

pursue policies to insulate their farmers from the effects

of the world market, using tariff and non-tariff barriers to

keep the world price out of their market and allow a higher

price to prevail domestically. This allows a larger and

more prosperous domestic agricultural sector to exist, but

interferes with the workings of the market mechanism in

international trade.


Importance of Vegetable Trade


International trade in fresh vegetables has become

increasingly important to both developed and developing

nations. United Nations trade data indicate that trade in

fresh vegetables, SITC 054, increased about four fold

between the years 1962-1982. The total quantities of

imports and exports of fresh vegetables among major trading

regions, Latin America, the United States, Canada, the

E.E.C., the Middle East, the Far East, Africa, and the Non-

E.E.C. Western European nations, in 1962 were 3.69 million









10

and 3.59 million metric tons, respectively. By 1982 those

totals had increased to 14.82 and 13.33 million (Table

1.1). These trade data clearly demonstrate tremendous

growth in the last two decades. Trading partners have

changed, as well as the degree of regional competition. The

potential for market growth and, hence, changing market

shares, is of paramount importance to those regions

attempting to expand their export markets.

In deciding to work with data at the 054 level, all

types of vegetables have been aggregated into one category,

fresh vegetables. Specifically, the SITC codes of 054.1,

054.2, 054.4, 054.5, and 054.8, or, fresh potatoes, not

including sweet potatoes; dried beans, peas, lentils and

leguminous vegetables, fresh tomatoes, other fresh

vegetables; vegetables frozen or in temporary preservative;

and vegetable products, chiefly for human food necessities;

have all been aggregated into the section 054 (United

Nations,1961). This is a high level of aggregation and

includes vegetable subgroups whose characteristics are

different; indeed essentially the only trait they all have

in common is that of being vegetables. However, this level

of aggregation is justified exactly because the purpose of

this study is to examine world vegetable trade, its levels

and patterns of demand and supply, and how these have

changed over time, and not the characteristics of particular

subgroups.











TABLE 1.1

IMPORT AND EXPORT QUANTITIES BY REGION, 1962 AND 1982.


Region


1962


Imports


1982


Exports


Imports


Exports


---metric tons---


---metric tons---


Latin America
U.S.
Canada
E.E.C.
Middle East
Far East
Africa
Non-E.E.C.
W. Europe


World


204,453
315,787
464,714
1,204,242
54,086
73,205
120,444

1,259,439


3,693,370


241,001
680,314
252,491
1,150,762
180,860
39,976
666,741

383,364


3,595,509


225,246
1,141,592
679,947
10,782,704
198,499
536,520
504,027


193,554
1,458,805
684,132
1,408,266
405,670
7,729,112
375,745


758,184 1,073,417


14,826,719 13,328,701


I='I= = = = = = = =--~P=I~r~r









12

Data from the Foreign Trade Statistical Bulletin,

Series C, on exports and imports, indicate that, although

the demand and supply equations will be estimated at a high

level of aggregation, their compositions, in both quantity

and value terms, remained relatively constant in the years

1960-1971 (Tables 1.2,1.3,1.4, and 1.5). That is, the

proportions of the totals for demand and supply at the 054

level made up of the subsections of 054 remained relatively

constant, while the absolute levels did not. Thus, although

a high level of aggregation will be used, because each

demand and supply function's composition remained relatively

constant, it is valid to consider measurements of these

functions over time as measurements of relatively unchanging

products.


Problem Statement


Trade in vegetables increased dramatically in the

twenty-one years from 1962 to 1982 and continues to grow in

importance, both in established and emerging markets. This

trade is influenced by a number of factors including world

economic conditions and national domestic and trade

policies. National policies pursued to enhance the

competitiveness of products are also important. Thus

several factors interact to determine the flow of vegetables

around the world; vegetable trade is not simply driven by

the principle of comparative advantage in production. Nor
























II
II
II
II
II
II
II
II
II
II
II
II
II
II

0 II

H II
o II
II
o II
II
O II
Q II
0 II

II
u II
II
H II
Cl) II





El
II


SII

O II
II


c 11



o II
II
. II
S II
II



O I
II


0 II
II


II
i II
H II




W II
SII
II
S II




O II






U 11


0o0( 0- o00 C 0@ 0O m N o4 o 0 0 NO WM M-, o
O N o- ooonomeo oo enmoo o Ie nw n
0%0N O oommN o0wwome oN fo4e
O so o o a m ct o < < o r n



o'o oN oinei -rro ON -wi' N oaomOiri-4N
o o N o0 o0oo mo o a it n 0 oMommc Q-i

orI o o wo omo o 0oo e 04 N
o-m o Oa vo o '-< M *
I *- 1-14 -4 -4







wIO ro %'-Do 'UC4tOn W e Onr- ow. c)wo- ow
.-i qr- %aDk r-r-%Dor P.r- w %oVo %a O 0 %-4 m -WNO7r-

000 w'D NO0 l"4qoo^r .A'wa>> >i' O%.-w.-iq
0 o % w0 0 r o w wl O o-n -w m4 i-Oi
om o o nrM o






* .



mm *o D o m -o Ipar o V en)4 wm


t" rI rM f wo0 m) n f mororo^m C4ra % % o % -Wr- C
o'CO O -4oCh M CO as 0% V) %D vVomCCOD hQrl
Nw w mm m C oen W





3C a C, a a a C, oD, 0

laufl fIfA ILinmulmmA f tntntmmfml mi mmmm il
oo000 00 0000000 0000000 0000000oooooo


oG

u"a





cw a
01
*C



W U







z0
e ca





*a a











c@1
u 0 C
."iD







41
o a



00
'-4

a.
ooz


CHO


o a a
D 0
1 a


(11

( n

o o GD






C1 0S 0





L) C u
uWE Yui
SO B 0


a
c

> o





c






9


o





















3




'U
H




>1



4J
-4
4J
















































E0


0 w

0
o1-


o


00 ,-~



-.-,-


* *

0 r-4 r-1
1-I







* *

0 r-l W







































co o\ n

crW








*


000


0 ko 1-4 r-l




-I





o Dvo r- %D


0 0O 0
00 N V






r-lO






co N- -%



w m





















AA L
mmo> o
OD N n [^
mr r-4 C4










in in in Un
CCC)


O 0 Cr-
0 CM r-l
r-I


r-i OD"W




















0r- m00

r- m co
ONcr- OD -W















Ln un Ln Ln









cr>


1-4


* *









0 l0 0 N





Or-













o C- r- %-
00o00 o o














1-1





















u o- Lo r



000 0
co o c
















II

II



It
H



I
H



H
H

H

















X N
U
H
H





















0
II


II






















0
H



























E iN
II

II











0
0
II
H















0
H


SII



1-1
M






D H
H


II
08I

- II
E-l
M l



OI
Q u


H
II





rg
O H
OI
0 I
O H
*II

OH


0#-1 0 4 0 r-00 0 r-40
000 000 0 OQ-4 0 r-l m

0 0 0 OJ 0 '
0 0 0 0
i- r-l H




oNrC-i oeN o tn o o ir
000 000 0 0o 0 mr-(n
0 0 0 O 0 0
0 0 0 0 r-
r-4 r4 r1- r-4








N. r-NI m 0 0 C
qw. O Pwq -O90 V
1-M1 V -

C4 r-4 r,-4 (4













CM Q4 I %a r
O'n0( m Os'.D 9 %o r- r- 0
0 r-4 C4 0 0 0
0 0 tl a0 0
1-4






H 40 Hxr i n r-4 w 9 *9* *9* *


000 0 0000 0000


I

I




.4.'I 9
i- l

0 C )


















1.41
10











'U
a)
















O Q Onw omNa wr

0Q 0UC C 1 0C C; 4'

r r- r-4





0 0 00Wn 0 ON 0r-l

oQ o oq ouin 4
Q r-4 0 a a-
Dr IV 0n "M
r- r- r-l


ocom n










000 I 0
1-4


II
it
II
II
II
II
II
II
It
H
II
If
f
II
II
It
H
H
II
II
H

II
II

H



if
I
II




II







0
If
H




H







E
H
Si






m
H



.. N
I'



*H
II

II


H
Oi
II



SII



- N
nhI







Eu


0 I
0II








H 11
En 11
II

u II
U II
Oil


H


PU


mO CS 0r- m (mOc oN r- co
ON % oN qwr 4 o0o4-
r-4 ^r r as C o CD r-4








46 4 s % % %

% 0 4wD M '0 00 00











*%* % S f
U) oon 0% oonmo m oooa

qer > 'r-'q qeqlqe'q- r-r4 im.q









CD ooD CDo 00 C C )Q D0 )C


I
I
I
> 1
41 0



I
4)









17

is trade in vegetables static; as economic conditions,

domestic policies and perhaps even the structure of the

trade environment change, forces are set in motion to cause

adjustments in vegetable trade patterns.

This study will examine world trade in vegetables over

several years. Vegetable trade depends directly on the

importing countries' demand for the particular product.

Demand may differ according to the source of supply.

National or regional domestic agricultural, trade, and

policies to enhance product competitiveness also likely have

a direct effect on product demand and available supplies.

Income effects and demographic patterns must also be

accounted for when estimating demand equations.

An empirical measurement of these demands is essential

to evaluate pricing policies and to form long run trade

projections. Empirical demand estimates show the relative

growth as well as differences among competing products. The

price parameters can be used to explore differential pricing

policies and for measuring the impacts or differences in

trade barriers.

Specific objectives for the research project are:


(1) Develop the theoretical demand and export supply
models for selected vegetables traded
internationally. These models should reflect
demand differences due to quality, that is
point of origin, differences due to national
incomes populations, prices of other goods,
and the structure of the international trade
environment, including major trade regions,
trade barriers and preferential treatments.
The export supply equations should reflect the
unique production capabilities of each country









18

or region as well as the exporters'
responsiveness to the average export price.

(2) Estimate demand and supply equations for each major
trader simultaneously in a world trade model.

(3) Provide insights into the policy implications for
differences in vegetable demands for
alternative production sources.

Scope


The purpose of this study is to estimate the demand and

export supply for fresh vegetables for each of the major

trading regions of the world. A world trade model will be

constructed that takes into account trade conditions such as

tariff policies, exchange rates, levels of economic

activity, demographics, and national or regional

agricultural policies. Demand and export supply equations

will be estimated simultaneously within the constructs of

this model to allow for the estimation of consistent

parameter estimates. Quantities and prices of vegetables

will be analyzed at the 054 level which is defined as fresh

or dried vegetables, roots and tubers (United Nations,1961).


Methodology


A world trade model based on one outlined by Armington

which distinguishes between products by place of production

will be constructed (Armington,1969). In this model, total

import demand for a good such as vegetables will first be

determined; this import demand will then be independently

allocated among competing sources of supply, or products. A









19

constrained estimation procedure will be used to guarantee

that estimated world exports equals world imports.

Econometric procedures will be used, within the

constructs of this model, to estimate demand and export

supply equations. A simultaneous system will be used as it

is likely, when estimating demand and supply equations in

international trade research, that the use of ordinary least

squares would yield biased and inconsistent results.

The structure of the international trade environment

will be built into the trade model. That is, demand

equations will be specified for only the major traders, be

they countries, blocs of countries or regions. Likewise,

export supply functions will be specified for each of the

major traders. Tariff barriers and preferential treatments

will be incorporated into the model with equations linking

regional CIF, cost of insurance and freight, prices with

regional market prices. The market prices are then used to

estimate demand equations. For those suppliers facing

tariff barriers into an import market, the market prices of

their products in that market will be higher than those of

other suppliers, and consequently one would expect the

demand for their products to be lower. For those receiving

preferential treatment, the prices of their products will be

lower, and in all probability, demand will be higher.

World economic conditions will also be incorporated

into the trade model. Exchange rates and transportation and









20

distribution costs will all be reflected in the market

prices of the products. National incomes and demographic

patterns will be incorporated into demand equations.

Implementation of the world trade model will yield

insights into vegetable trade among the major participants.

Demand and export supply equations will be estimated and

numerical values obtained for parameters. Knowledge of the

parameter values will give policy makers valuable insights

as to the impacts which could be expected through the

implementation or changing of a policy. The insights gained

by use of the model could be used by policy makers to arrive

at more knowledgeable decisions regarding their country's

participation in world vegetable trade.

Thus, construction of a world trade model which

distinguishes products by place of production, estimates

demand and export supply equations within a simultaneous

system and only for the major traders, has market prices

which reflect the prevailing tariffs and preferential

treatment agreements, and demand equations which take into

account both world and national economic conditions, will

accomplish objectives numbers one and two. Careful

consideration of the results will yield insight into the

impacts of policies on demands for products distinguished

by place of production, which will accomplish objective

three. These insights could be quite valuable for

government policy makers attempting to increase the benefits









21

to their nation from participation in international

vegetable trade.


Overview


Chapter I has set the stage for this project. The

world wide importance of trade has been discussed, with

emphasis on agricultural trade and fresh vegetables in

particular. The growth in fresh vegetable trade from 1962

to 1982 was remarkable. This growth merits study to

discover the major factors behind it and the strengths of

these factors. Chapter II will discuss the levels and

patterns of trade and production in vegetables among the

major traders for the years 1962 to 1982. These patterns

will be incorporated into the world model. Chapter III will

review the relevant literature and Chapter IV will present

the theoretical model, based on Armington's theory of demand

distinguished by place of production. Chapter V will

discuss the relevant econometric issues for estimation of

the model. The empirical estimates will be presented and

analyzed in Chapter VI. Simulations of the effects on the

trade system of changes in exogenous variables will be

discussed in Chapter VII. Chapter VIII will discuss the

implications of the study, with particular emphasis on

policy implications for the U.S. Chapter IX will review the

study and present its conclusions, as well as possibilities

it suggests for future research. Together the chapters will









22

comprise a dissertation which uses a simultaneous system to

estimate the demand and export supply parameters for fresh

vegetables as distinguished by place of production, uses

these estimates to simulate the effects on the system of

changes in exogenous variables such as tariff levels,

national incomes, and population levels, and goes on to

discuss the policy implications of these parameter estimates

and simulated scenarios.
















CHAPTER II


CHARACTERISTICS OF TRADE AND PRODUCTION OF FRESH VEGETABLES
WORLD-WIDE


Introduction


The purpose of this chapter is to present the world

patterns of trade and production in fresh vegetables as

revealed by U.N. data. Absolute levels of production,

inter- and intraregional trade are examined as well as

percentages of world totals, growth rates, and major

directions of trade. The major trading regions are also

discussed.

In order to begin the analysis the world was divided

into eight regions: Latin America, the United States,

Canada, the E.E.C., the Middle East, the Far East, Africa,

and the Non-E.E.C. Western European nations. These

divisions were determined by considering the strength and

manner of participation in the world economy. For example,

while the U.S. and Canada are both strong participants in

the world economy, there are no Latin American nations that

have an impact such as to be considered on an equal basis

with these two. However, as a region Latin America has a

strong level of participation in world trade. The same

holds true for the Middle and Far Eastern nations, Africa,









24

and the Non-E.E.C. Western European nations. The E.E.C.,

which acts as a single economic unit with regards to world

trade, should obviously be considered as one region and not

separate nations. Only market economies are considered in

this study, excluding the Eastern European nations as well

as China and Cuba.

The U.N. trade data of SITC 054 and FAO production

data covering the equivalent commodities for 1962 through

1982 are used. During that time period many changes

occurred in the world trading environment, one of the most

significant being the expansion of the E.E.C. in both

numbers of members and economic impact on international

trade. All E.E.C. members participate in the Common

Agricultural Policy which, among other policies, has strong

barriers to entry for agricultural imports. The E.E.C. also

has preferential trading agreements with many of the

Mediterranean and African nations, which tend to distort

levels and patterns of trade from those that would be

observed if free trade existed. In 1973 the E.E.C.

admitted Great Britain, Ireland, and Denmark to the

original six members of France, Germany, Italy, Belgium,

Luxembourg, and the Netherlands. In 1981 Greece became a

member. In order to see the impacts of these expansions on

trade, statistics for the years before and the years of the

expansions are presented. Also, in order to detect the

trends going on in levels and patterns of trade, tables are









25

presented in approximately five-year intervals. These

tables are all found in Appendix C.


Levels, Percentages, and Growth of Production


Table 2.1 presents levels of production by region,

regional percentages of total world production of fresh

vegetables for 1962 and 1982, and the 1982 levels divided by

the 1962 levels. This final column will be interpreted as a

growth rate for production levels. Thus world production of

fresh vegetables grew at a rate of 1.39 from 1962 to 1982;

that is, the 1982 level was 1.39 times the 1962 level. The

regions showing the highest rates of growth were the Middle

East at 4.40, Canada at 1.71, and Africa at 1.69. Those

regions which produced the largest percentages of total

supplies of fresh vegetables in both 1962 and 1982 were the

Far East, Africa, Western Europe, and Latin America,

respectively.


Levels, Percentages, and Growth of Trade


Tables 2.2, 2.3, and 2.4 use 1962 as a base and present

the ratios of 1982 quantities of imports and exports for

inter- and intraregional trade to 1962 quantities by region

and for the world as a whole, where the world consists of

the eight regions selected for this study. The absolute

levels of intraregional trade were much higher than those of

interregional trade, 550,000,000 versus 3,693,370 in 1962

















On Lr- v 4

I -I o r-i










* 111









wm wa vCQCO
OOmONOO









mworoooa
ft ft %o o fto %

--. ~0- 0- S0 0



M r-4








000 CD Ch- Mr- 0
mU 0 WH ~0


mn CM qr r-

r-I o C4 r-


.nv-m 0
r


0 O"
w 4 r.


O a 410
0 ol 44 4

3 W X; Ue> F-4

.C .C
044 to r-4 >

) 0 U C,
1 -i C>v 0

r- c3 4J
0) (a 4) r. z

0 4. 0
MO U
CO4) rO .0
( 0 4 -1 'I c o-,
4)0) c :(a



1.4 0 01.C1)

o 0000
00 w (U0 X0
W --441-I 4 1
04 4J (0M
cc t-o (a (0
C0 10 --"0

c-0 CO Cl


4) = 0 c0 1



X; X! 0 C0 *
0 41 Cr


.r.4 w a (
(*0) W O) 4M
0)C 4 (0E-4 (1

4) _)C t


00 0 X 4j
w H M x 0




Z a o C 6 04
OW 04 0W





0 f l- 0^ i0
3 04 0 C4 i
M. 4 0 X*


*04 r-l '4) 0



C -l W 10P 0 4


0 4* .-I 0
C C HtM X0 V



03 1 4J r1.4
c U 0 0 .
0 CD *.-I

U 41 410al V0 41 0
0-I 4) t0 0)
Sx04J (n 04 04
SCO C 0 -I 0
0 u-I C
Q) C C 4J U
XC 4(U 0 T W
E- 1- a O r C
R0 CC 4J r- = 04 C-
*mmoo*MO( 0
MS 94GM;~c~
ON U* M
W0c .C*Nma
pro 0 e4
W1 L) OOL


m 0 r-o







CM
S. S
0OOaru
40'u"


$4 t E
0
U
*4 41


S 0 I

.O .O 3il
4J4 CCO W













TABLE 2.2


LEVELS OF GROWTH OF INTERREGIONAL IMPORT QUANTITIES,
1962 TO 1982.


Region 1962 1982 1982/1962

---metric tons--- ---metric tons---

Latin America 204,453 225,246 1.1017
U.S. 315,787 1,141,592 3.6151
Canada 464,714 679,947 1.4632
W. Europea 2,463,681 11,540,888 4.6844
Middle East 54,086 198,499 3.6701
Far East 73,205 536,520 7.3290
Africa 120,444 504,027 4.1847

World 3,693,370 14,826,719 4.0144



aSee footnote a of TABLE 2.1.












TABLE 2.3

LEVELS AND GROWTH OF INTERREGIONAL EXPORT QUANTITIES,
1962 TO 1982.


Region 1962 1982 1982/1962

---metric tons--- ---metric tons---

Latin America 241,001 193,554 0.8031
U.S. 680,314 1,458,805 2.1443
Canada 252,491 684,132 2.7095
W. Europea 1,534,126 2,481,683 1.6177
Middle East 180,860 405,670 2.2430
Far East 109,873 7,729,112 70.3459
Africa 666,741 375,745 0.5636

World 3,595,509 13,328,701 3.7070



aSee footnote a on TABLE 2.1.

1962 was an abnormally low year for Far Eastern exports,
therefore the 1963 level of 109,873 was used.












TABLE 2.4

LEVELS AND GROWTH OF INTRAREGIONAL IMPORT QUANTITIES, 1962
TO 1982.


Region 1962 1982 1982/1962

---metric tons--- --metric tons---

Latin America 45,248,604 68,817,734 1.52

U.S. 31,452,394 46,489,441 1.48

Canada 3,651,676 6,045,948 1.66

W. Europea 106,341,421 107,494,045 1.01

Middle East 10,368,301 45,757,430 4.41

Far East 290,000,000 380,000,000 1.31

Africa 58,395,811 100,000,000 1.71


World 550,000,000 750,000,000 1.36



aSee footnote a on TABLE 2.1.








30

and 750,000,000 versus 14,826,719 in 1982 for imports.

However, the levels of growth were higher for interregional

than intraregional trade, 4.01 versus 1.36.

Comparing Table 2.1, levels of production, with Tables

2.2 and 2.4, levels of inter-and intraregional trade, it is

clear that the vast majority of fresh vegetables remain in

the region in which they are produced. These are not the

vegetables of interest in-this dissertation. This study

analyzes fresh vegetables traded between regions. While

these make up a small percentage of total fresh vegetable

production, their share is growing rapidly. The level of

growth of this type of vegetable trade has been strong

enough to merit a study to discover the strength of the

forces underlying this growth.

Those regions which were strong participants in this

growth of interregional trade on the import side were the

Far East Western Europe, and Africa, with levels of

growth exceeding the overall world level. The Middle East

and the U.S. also had significant levels of growth in their

import markets, although less than the overall world level.

Latin America and Canada had a moderate amount of growth.

On the export side, the strongest growth was registered by

the Far East, distantly followed by Canada, the Middle East,

the U.S., and Europe. Latin American and African exports

declined dramatically to only .80 and .53 of 1962 levels.









31

Table 1 of Appendix B presents the import quantities

and percentages of interregional world vegetable imports by

region for each of the years 1962 to 1982. The major

importing regions, by a large percentage, were the two

European ones. In 1962 the E.E.C. imported 33 percent of

total world imports and the Non-E.E.C. Western European

nations 34 percent. Together they comprised 67 percent of

the world market for fresh vegetables. This grew a small

amount throughout the years 1962 to 1982, reflecting the

fact that the European growth in imports of fresh vegetables

was only slightly larger than total world growth; in 1982

with 78 percent of the import trade, European imports

dominated world vegetable imports. With the addition of new

members to the E.E.C. in 1973 and 1981, the region composed

of the rest of the Non-E.E.C. Western European nations

declined in membership and there was a noticeable shift in

percentages with the E.E.C. becoming a larger importer and

the Non-E.E.C. Western European region a smaller one.

Following the two Western European regions, the largest

importers of fresh vegetables were Canada, the U.S., and

Latin America. Their percentages of world imports in 1962

were approximately 13, 9, and 6, respectively, and in 1982,

5, 8, and 2. These numbers reflect that, of these three

regions, none had growth rates exceeding or even meeting

that of the world average, and thus all three regions

declined in their shares of world imports. Table 1,








32

Appendix B, demonstrates that Canada and Latin America,

while importing fairly large quantities, basically

maintained their status quo as importers. In 1962 Africa,

the Far East, and the Middle East had approximately 3 ,2,

and 1 percent of world imports and in 1982, 3, 4, and 1.

Africa and the Far East increased the absolute levels of

their import quantities, and at a growth rate exceeding that

of the world average. Consequently, their percent of world

imports increased. The Middle East, while showing strong

growth, did so at a level below the world level.

Table 2 of Appendix B presents the export quantities

and percentages of interregional vegetable exports by region

for each of the years 1962 to 1982. The European regions

again dominated, although not to the extent they did in

imports. Also, the percentage of world exports originating

in the European regions declined from 1962 to 1982,

reflecting the fact that their level of export growth was

below the world average. In 1962 the E.E.C. exported

approximately 32 percent of total world fresh vegetable

exports while the Non-E.E.C. Western European region

exported approximately 11 percent, or a total of 43 percent

of world exports originated in Europe. In 1982 the

percentages were 11 and 8, or a total of 19 percent.

In 1962 the major non-European exporting regions were

the U.S. with 19 percent and Africa with 18 percent. Both

declined in their shares from 1962 to 1982. Africa showed a









33

dramatic decline, from 18 to 3 percent. The U.S. had a

much less dramatic drop, from 19 to 11 percent. These

percentages reflect the fact that Africa did not even

maintain its absolute quantity level; its quantity level in

1982 was only approximately .56 of what it was in 1962.

The U.S., while not meeting the world growth rate of 3.71,

at 2.14 did more than double its levels of export

quantities.

The strongest region in terms of export growth was the

Far East. With a growth rate of 70.34, in 1963 the Far East

exported approximately 3 percent of world totals; in 1982

that had increased to almost 58 percent.

Canada, while decreasing in its percentage of world

totals from 7 to 5 percent, showed an absolute growth rate

of 2.71 from 1962 to 1982. While this did not meet the

world growth rate, it does show Canada experienced strong

growth in its exports of fresh vegetables. The Middle East

also showed strong growth in its exports. At 2.24 it was

below the world rate of 3.71, nevertheless it more than

doubled its exports.

To summarize, on the import side the fastest growing

regions were the Far Eastern and European regions. By 1982,

while the Far East still made up a small percentage of total

world imports, it had increased dramatically from 1962.

Europe increased somewhat from 67 percent of the world's

imports of fresh vegetables. The other regions with strong









34

growth in their vegetable imports were Africa, the Middle

East, and the U.S. Of these, only Africa's rate of growth

exceeded the world rate and therefore the percentage of

total imports to the Middle East and the U.S. declined from

1962 to 1982.

The regions showing the strongest growth on the export

side were the Far East and Canada. The Middle East, the

U.S., and the two European regions also showed growth in

their exports. Latin American and African exports declined

on an absolute level, consequently their levels of growth

were below one.

The fact that the combined European regions were among

the fastest growing for vegetable imports and comprised the

largest markets for vegetables has major implications. The

CAP is a very effective mechanism for limiting imports into

the E.E.C. from those nations or regions with which it does

not have preferential trading arrangements The U.S. is one

of those regions. It is very possible that the CAP has

hindered the growth of U.S. exports of fresh vegetables,

keeping the growth rate of U.S. exports below the world

rate. On the other hand, the Middle East and Africa both

have preferential arrangements with the E.E.C. This may

partially account for the strong growth in Middle Eastern

exports. Theoretically, the preferential treatment should

give Africa a comparative advantage in the E.E.C. market,

which should contribute to growth of African exports.








35

However, Africa's exports declined dramatically from 1962 to

1982. The empirical results of the trade model should yield

some insights into this phenomenon.


Patterns of Trade


Introduction


Tables 1 through 7 of Appendix C present interregional

import quantities by region by partner region for the years

1962, 1967, 1972, 1973, 1980, 1981, and 1982. Tables 8

through 14 of Appendix C present export quantities by region

by partner region for the same years. These tables will be

used to determine major patterns of world trade in

vegetables; who traded with whom and how this changed in

the time period under consideration.

There is a great deal of information contained in each

of the tables in Appendix C. They all follow the same

format and in order to extract their information, one must

understand how it is presented. The following few

paragraphs is a discussion to aid in that understanding. It

is presented from the import side.

Tables 1 through 7 of Appendix C each present import

quantities by region by partner region for a particular

year. The regions are the importers, the partner regions

are who they import from. Along the right hand side of each

table are numbers; these are row sums which tell the total

quantity imported by each region for that year. Beneath the









36

quantities are smaller numbers; these are the percentages of

total world imports received by each of the regions. These

quantities and percentages match those in Table 1 of

Appendix B which presents quantities and percentages of

imports by region by year. At the bottom right corner of

each of the tables of Appendix C is a number which sums all

of the row totals and consequently is total world imports

for a particular year. Along the bottom of the table are

column sums. These delineate the total quantities of

imports obtained from each of the partner regions. Beneath

the quantities are the percentages of total world imports

supplied by each partner region. The column sums can also

be summed to obtain total world imports.

In the top left hand corner of the tables are the four

words frequency, percent, row percent, column percent; one

under the other. These delineate the types of numbers found

in each square of each of the tables. The top number is the

frequency, or quantity of imports to a specified region from

a specific partner region. The second number is the percent

of total world imports for that year which the trade between

the two specified traders comprised. The third number, row

percent, is the percent of total imports to a particular

region from a specified partner region. The final number,

column percent, is the percentage of the total world imports

from a particular partner region going to a specified

region.











As an example, Table 1, Appendix C, presents import

quantities by region by partner region for 1962. Looking at

Latin America as the region and the U.S. as the partner

region, Latin America imported 64,055 metric tons from the

U.S. in 1962. This comprised 1.73 percent of total world

imports for that year. Latin America obtained 31.33 percent

of its imports from the U.S. and of all the world's imports

from the U.S., 9.52 percent went to Latin America.

This example illustrates what a wealth of information

is contained in each of these tables. They will be used to

discern patterns of world vegetable trade, which are

discussed in the following few pages.


Observed Patterns in Imports


Recalling that the two Western European regions were by

far the largest importers of fresh vegetables, Tables 1

through 7 of Appendix C reveal that they obtained a large

percentage of their vegetables by importing among

themselves. This pattern became less prevalent for the

E.E.C. from 1962 to 1982, from 25 percent to 10 percent,

while the opposite occurred for the Non-E.E.C. Western

European region. The expansion in membership of the E.E.C.

caused an increase in the Non-E.E.C. Western European

region's imports from the E.E.C. In 1962 this region

received approximately 58 percent of its imports from the

E.E.C. These percentages remained essentially constant








38

until 1973 when, with the addition of the U.K., Denmark, and

Ireland to the E.E.C., they jumped to 74 percent, and in

1981, 73. The addition of Greece to the E.E.C. in 1972

appeared to have less impact than the addition of the U.K.,

Ireland, and Denmark, although other factors could be

masking its effect. In 1981 the Non-E.E.C. Western European

region received 73 percent of its imports from the E.E.C.

In the early 1960s the E.E.C. received the bulk of its

vegetable imports which did not come from European sources

from Africa, but by 1967 the Far East was becoming a primary

source, with the percentages of E.E.C. imports obtained from

each approximately equal. However, the Far East rapidly

overtook Africa and by 1982 the E.E.C. obtained 79 percent

of its interregional imports from the Far East and only 3

percent from Africa. Thus there was a shift in E.E.C.

imports away from Africa and Europe as suppliers and towards

the Far East. This is consistent with the growth levels

observed in the exports of these three regions; Far Eastern

exports increased 70 times over, European almost 2 and

African exports in 1982 were only .56 of 1962 levels. The

Non-E.E.C. Western European region had more varied sources

for its non-European vegetable imports than the E.E.C. In

the early 1960s these other sources were Africa, the Middle

East and the U.S., in that order. In 1973 Latin America

also began to supply a significant proportion and the

region's share of its imports from the E.E.C. began to









39

increase. From 1973 on, with the E.E.C. percentages

increasing, Latin America, the U.S. and the Middle East

maintained their shares while Africa's declined.

The largest importers after the European blocs were

Canada, the U.S., and Latin America. In the 1960s the U.S.

supplied approximately 92 percent of Canada's imports, Latin

America supplied 7 percent, and the Non-E.E.C. Western

European region approximately 1 percent. The 1970s and

1980s showed an increasing dominance by U.S. suppliers to

the point that all other regions were essentially excluded.

In 1982 the U.S. supplied 93 percent of Canada's vegetable

imports with Latin America supplying approximately 5

percent.

The U.S. obtained the bulk of its vegetable imports

from Latin America and Canada, in that order. The European

blocs supplied a small amount, although their total

percentage declined and was almost completely taken over by

E.E.C. supplies as this region grew in numbers. In the

1960s and 1970s Latin America supplied an increasing

percentage of U.S. imports, with Canada a decreasing one.

In the 1980s that trend was reversed, nevertheless, in 1982

Latin America still supplied 68 percent and Canada 30

percent of U.S. fresh vegetable imports. Thus the large

majority of U.S. vegetable imports in 1982 were obtained

from Latin America.








40

In 1962 Latin America received 38 percent of its

interregional imports from the E.E.C., 31 percent from the

U.S., and 25 percent from Canada. These three regions

continued to dominate Latin America's imports throughout the

1960s, with the Non-E.E.C. Western European region's

percentage also growing. In the 1970s and 1980s the U.S.

became dominant such that by 1982 the U.S. supplied 54

percent of Latin America's imports with the E.E.C. supplying

only 21 percent.

Throughout the two decades, Africa imported a small

percentage of total world imports but showed itself to be a

strong growth market. In the early 1960s the E.E.C. and the

Middle East were its primary suppliers with the U.S. and

Latin America supplying a small percentage of its imports.

By 1967 the Non-E.E.C. Western European region had emerged

as an important source and throughout the 1960s these were

the major suppliers to Africa. In the 1970s and 1980s, the

Non-E.E.C. Western European region dropped off. By 1982 the

E.E.C. supplied 64 percent and the Middle East 24 percent

of Africa's imports. Data from 1981 and 1982 also indicate

that the U.S. and Latin America were gaining a stronger hold

on the African import market.

In 1962 the Far East received the majority of its

vegetable imports from Africa, the U.S., and the E.E.C.,

with about 25 percent from each. The Middle East supplied

approximately 11 percent. In the 1970s and 1980s supplies








41

from the E.E.C. and Africa declined while those from the

U.S. increased. Oceania also began to be a major supplier

to the Far East, but this region had such a small level of

participation in world vegetable markets that it is not

discussed in this study. In the 1980s the Middle East also

began to be a significant supplier to the Far East.

In 1962 the Middle East imported primarily from the

Non-E.E.C. Western European region, Africa, and the Far

East. In the 1970s the E.E.C. became a primary supplier but

this dropped off in the 1980s and the Far East became a

major supplier. By 1982 the Far East supplied 63 percent of

the Middle East's imports, Africa 16 percent, and the E.E.C.

12 percent.

To sum up patterns observed in vegetable imports from

1962 to 1982, the majority originated and were received in

Europe. Major European suppliers from outside Europe were

Africa and the Far East for the E.E.C. and the Middle East,

Africa, U.S., and Latin America for the Non-E.E.C. Western

European region. There was a great deal of activity between

the European blocs, the Far East, Middle East, and Africa,

with each of these being significant suppliers for the

others, at least at some point in the time interval being

considered.

Within the Americas, there was a great deal of trade

between the U.S., Canada, and Latin America. Canada

received virtually all of its imports from the U.S. and the








42

U.S., the bulk from Latin America and Canada, in that order.

Imports to Latin America were negligible, but of the amount

that existed, a great deal of it was from the U.S.

Percentage-wise there was not a great deal of trade

between Europe and the Americas, although the absolute

quantity levels were high. Given the volume of vegetable

trade the European blocs engaged in, even the fairly high

quantity levels received from the U.S., Latin America, and

Canada made up a small percentage of their total imports.

Latin America did receive a high percentage of its imports

from the European regions throughout the time period 1962 to

1982. All three of these regions exported to the Middle

East, Far East, and Africa, although the U.S. was the most

significant supplier. However, the American regions

received essentially no imports from these three regions.


Observed Patterns in Exports


The majority of world exports of fresh vegetables

originated and were traded in Europe. From 1962 to 1982

European exports declined as a percentage of world totals,

but of Non-E.E.C. Western European exports, the percent

traded with the E.E.C. increased while the opposite was true

of E.E.C. exports. As with imports, there was a significant

amount of activity between the European blocs, Africa, the

Middle East, and the Far East. In the 1960s and early

1970s, the E.E.C. was a major market for African vegetables








43

and by 1982 was a major market for Far Eastern and Middle

Eastern exports, which were both growing rapidly. Africa

declined in importance as an exporter of fresh vegetables

(Tables 8 through 14, Appendix C).

There was a significant amount of trade between the

U.S., Canada, and Latin America, with the majority of their

exports remaining within the Americas. However, a fair

amount of exports from the Americas were destined for Europe

and some to the Middle East, Far East and Africa.


Conclusion


It is clear from the discussion of trade levels and

patterns, and Table 2.1, that the growth and changes which

occurred in the trade of fresh vegetables had little to do

with its production characteristics. Trade in 1982 was more

than 3.7 times its level in 1962, production grew at a rate

of less than 1.5. The Middle East, which experienced the

strongest growth in its production levels, also experienced

very strong growth in its imports. The Far East, whose

production grew by less than the world rate and whose

percentage of total world production thus declined from 1962

to 1982, experienced the strongest rate of growth of its

exports. It appears then that supply characteristics are

not the driving forces behind international trade in fresh

vegetables. This study will focus primarily on the demand

side in an attempt to discover and measure the strengths of

the factors which drive this trade.









44

This chapter presented statistics regarding levels for

both trade and production, percentages, and rates of growth,

and patterns of trade among the eight trading regions in

fresh vegetables from 1962 to 1982. These data illustrate

that, while production grew only slightly, trade in this

commodity grew substantially in this time period. Also, the

patterns of trade were not static and were apparently not

related to patterns in production levels. There were

changes in the patterns of demand and supply between the

regions from 1962 to 1982 which were contrary to what one

would expect by looking at production levels. The regions

experiencing strong growth in their production levels also

had strong growth in their imports, the region with the

strongest growth in its exports had one of the weakest

levels of growth in production. The growth in the levels

and shifts in the patterns of trade, apparently unrelated to

levels and patterns of production growth, are evidence that

there were strong economic forces at work on the demand side

causing major changes in international fresh vegetable trade

from 1962 to 1982.

This study is an attempt to identify what the forces

are that are causing changes in the levels and patterns of

trade of fresh vegetables and to determine their relative

strengths for each of the major traders. With the growth

and changes that have occurred in vegetable trade, there is

room for growth of U.S. exports. The information provided









45

by this study could be used by policy makers to facilitate

increasing U.S.' exports and the U.S.' market share of other

regions' import demands.
















CHAPTER III


LITERATURE REVIEW


Introduction


This chapter will provide a discussion of previous

studies of international trade for the purposes of gaining

some insight on the approaches of other authors and

providing a foundation for evaluating the contribution of

the present study. There will be two major areas of focus

based upon two widely used methods of obtaining empirical

estimates of demand and supply functions in trade research.

These include the direct application of standard econometric

techniques and the use of these techniques within the

confines of a world trade model. Issues discussed in both

of these approaches are relevant to the present study.

Consequently, this chapter includes discussion of both

approaches, covering major areas of debate within each and

relevant empirical applications of the methodologies.


World Trade Model Approach


This approach to estimating demand and supply functions

in international trade requires the construction of a model,









47

within whose structure econometric techniques are used for

empirical application. The model contains demand and supply

equations for all the major world traders and is built on

assumptions which allow for its simplification and self

containment.

Within the world trade model approach, there is debate

as to whether it is a closer approximation of reality to

treat the commodity classes as if they were homogeneous

goods or whether the exports within a class produced by

different nations should be regarded as different goods.

The trade model specification is quite different in the two

cases. Given that a major objective of this research is to

develop demand models for vegetables which reflect unique

characteristics based upon their point of origin, the

approach which distinguishes between goods by place of

production is that which is of relevance here. In this

case, the specification of the demand functions follow

Armington's utility tree approach where the total import

demand for any good is first determined; this total import

demand is then independently allocated among competing

sources of supply, or products (Armington,1969). A

constrained estimation procedure is used to guarantee that

estimated world exports equals world imports.

In Armington's model the distinction between goods and

products is an important one. A good denotes a general type

of merchandise, for example vegetables, meats, etc. A









48

product denotes a good manufactured or produced in a

particular country or region. Thus U.S. vegetables and

Canadian vegetables are two different products, although

within the same class of goods. In Armington's model these

two products are imperfect substitutes. This is a crucial

assumption and one that sets this model apart from many

other trade models and theories. It is frequently assumed

in international trade theories that merchandise of a

certain type supplied by one country is a perfect

substitute for merchandise of the same type supplied by any

other country. This then implies an infinite elasticity of

substitution and constant price ratios between these

supplies. This does not follow for Armington's model as

products of the same type of good are considered only

imperfect substitutes.

Another crucial assumption is that buyer's preferences

for different products within any given type of good, U.S.

vegetables, Canadian vegetables, are independent of their

purchases of products in any other type of good, U.S. meats

or Canadian meats, for example. This allows for the

measurement of the quantity of each good demanded by each

region, or that region's market for that good. Within a

region, goods compete in order to determine the sizes of

their respective markets. Products compete within these

goods' markets in order to determine their market shares.

Therefore, the demand for any particular product in any









49

region can be expressed as a function of the size of the

market for that type of good and of the relative prices of

the competing products.

Another important assumption is that each region's, or

product's, market share of a good's market is unaffected by

changes in the size of that market as long as relative

prices in the market remain unchanged. With the above

assumptions it can be deduced that the size of a good's

market is a function of a region's income, or GDP, and the

prices of the various goods. Furthermore, the demand for a

product is a function of income, prices of each good, and

the price of that product relative to the prices of other

products in the same market. Or:


(3.1) X(i.) = f{GDP(i),P1 ,P2,...,Pz}


(3.2) X(ij) = f{ X(i.) P(ij) / P(i.)}


where

X(i.) = region i's demand for the good under
consideration

X(ij) = demand for product j

i = demanding region
= 1,2,3,...,n
j = supplying region
= 1,2,3,...,n

n = the number of regions in the model

Pl,P2,...,Pz = the prices to region 1 of goods
1,2, ...,z

P(i.) = the average market price of the good under
consideration

z = number of goods considered in the study












GDP(i) = income of region i


Note that the prices of products competing in that region's

markets for other types of goods have an influence only in

so far as they determine the prices of goods.

The final set of assumptions is made to simplify

estimation when there are many sources of supply, that is,

many products. These assumptions are that the elasticities

of substitution between products competing in any good's

market are constant, they do not depend on market shares.

Also, the elasticities of substitution between any two

products competing in a good's market is the same as that

between any other products competing in that good's market.

In Armington's model, there is, for each country or

region, a set of demand functions for the products of each

region, including the home region (Armington, 1969). Also,

for each region there is a supply function for each of its

domestically produced products. The regional demand

functions for each product are summed to obtain individual

product world demand functions. The interaction of the

world demand functions with the regional supply function

yields the price and quantity of that product. A weighted

average of the prices of the products yields the world price

of a good. All product producers of a particular good are

seen as competitors and the model determines how much of

each product is sold where. That is, domestic sales of








51

products as well as trade flows from every region to every

other region are determined by the model.

Armington's model can be used to look at changes in the

demand for a product. By differentiating the demand

functions the change in the demand for any product can be

shown to depend additively on the growth of the market in

which it competes and the change in the product's share in

that market, where product share changes are dependent upon

relative price changes of products in that market. Market

growth is dependent upon income changes and the income

elasticity of demand for the respective good.

These results provide support to the validity of the

modified shares approach to trade forecasting. This

approach is often used in trade research and forecasting and

consists of two major steps. The first forecasts growth in

various markets with a base period matrix. This yields a

constant shares matrix for the projection period. The

constant shares matrix is then modified to take account of

factors which would 'probably yield gains or losses in

shares.

The modified shares methodology was used by Sarris to

project changes in world trade of fruits and vegetables with

the enlargement of the E.E.C. to include Spain, Portugal and

Greece (Sarris,1983). Enlargement would necessarily imply a

change in trade barriers to allow Spain, Greece and Portugal

to participate in the Common Agricultural Policy, CAP, of

the E.E.C.









52

Sarris' first step was to project world trade in fruits

and vegetables with no change in trade barriers, using,

however, projections of consumer income for each country.

Changes in consumer income result in changed import demand,

changed prices and changes in supply patterns, all of which

result in a new set of trade patterns.

The second step was to relax the trade barrier

assumption. Prices of imports to the E.E.C. from Spain,

Greece and Portugal were reduced by an amount calculated to

simulate their joining the E.E.C. These price changes

resulted in changes in patterns of demand and yielded a

projection of post-enlargement trade.

To accomplish his objectives, Sarris used Houthakker

and Magee's methodology of obtaining income and price

elasticities and Hickman and Lau's methodology of estimating

elasticities of substitution (Houthakker and Magee,1969;

Hickman and Lau,1973). Houthakker and Magee used a double

log specification of demand equations, which they estimated

with ordinary least squares. Hickman and Lau used a linear

world trade system, generalized to include trend terms,

which they showed to be a first order approximation to a

theoretical demand function as laid out by Armington.

Therefore, the estimated coefficients of the relative price

variables can be interpreted as the elasticities of

substitution between imports in given markets. In their

estimations, import quantities and import and export prices









53

are taken as exogenous. Consequently, the elasticities of

substitution were not estimated in a simultaneous system.

Sarris' work is an empirical application of

Armington's theoretical work. The general methodology used,

a modified shares approach, was shown by Armington to be a

valid method of trade projection when considering demand as

distinguished by place of production. The values for the

income and price elasticities, as well as the elasticities

of substitution were obtained using the methodologies of

Houthakker and Magee, and Hickman and Lau, within

Armington's theoretical framework. No attempt was made to

take account of simultaneity in the system in the estimation

of the parameters.

Winters analyzed the manufactured exports of developing

countries using an Armington type model (Winters,1984a). He

estimated demand and supply equations for manufactured

exports using single equation and systems techniques. He

also estimated the reduced forms which incorporated all of

the explanatory variables of the single equation models,

except price, which would be an endogenous variable. Not

having to estimate a parameter for price was a strong point

for the reduced form as the signs on the price variable were

contrary to theoretical expectations for demand and supply

in both the single and systems estimations.

The estimation results were disappointing for all three

approaches, although the reduced form approach gave the most









54

plausible results. In the OLS estimations of demand, none

of the regressions were statistically significant and the

coefficients on relative prices were positive. For supply,

again the regressions were not significant and often the

coefficients on relative prices were negative. In the

systems estimation, the coefficients on relative prices were

often positive for demand while negative for supply. Thus,

removing simultaneity bias in the parameter estimates did

not resolve the sign problem on the price term. The most

reasonable results, according to economic theory, obtained

in the system estimation approach were for regions of the

world with just one country each, or regions dominated by

two large countries. Thus aggregation problems may have

played a role in the perverse results obtained. The

regional aggregations Winters was obliged to use were

designed with different purposes than his in mind. It

combined very dissimilar countries into the same regions.

Winters, however, attributed the sign problem on the

price variable to data inadequacies. His price data were

actually unit value data, obtained by dividing total value

of the traded commodities by total quantity. Unit value

data on aggregated commodities are often correlated with

quality. This occurs because the products aggregated into

one category are not homogeneous with regard to quality. If

sales within the aggregated commodity group shift towards

the higher quality product, the unit value, or price, of the









55

aggregated commodity will go up, although the prices of the

individual products have not changed. With an increase in

quality levels, it is quite likely that sales will increase.

Thus an increase in the price of the aggregated commodity is

seen along with an increase in sales; an apparent

contradiction to economic theory.

To get around this problem, Winters estimated the

reduced form equations where price, being endogeneous, was

not one of the explanatory variables. This approach led to

the most satisfactory results. The equations fit fairly

well and all of the estimates were plausible. Winters

concluded that many of the problems with his estimations

were a result of having to use unit value data for prices

and highly aggregated data, both in terms of commodities and

regions.

The significance of Winters' work lies in the fact that

he applied simultaneous estimation techniques to a model

based on Armington's theoretical approach. Inadequacies of

the data obscured any improvement over single equation

estimations, but theoretically the system estimations should

yield consistent parameter estimates. Single equation

techniques used to estimate the demand and supply of traded

commodities contain simultaneity bias.








56

Direct Application of Econometric Techniques


This section will focus on the use of OLS versus a

simultaneous technique such as 2SLS or 3SLS, to directly

estimate demand and supply parameters in international trade

research. The major debate within this approach concerns

that of when OLS is preferred to a simultaneous system and

vice versa. When using OLS, supply relationships are

typically handled by assumption and are not estimated.

Generally the assumption is made that the export and import

supply price elasticities facing any individual country are

infinite. This may be reasonable in the case of the supply

of imports to a single country but probably is not for the

case of the supply of exports from an individual country.

Unless idle capacity exists, or production is subject to

constant or increasing returns to scale, it is unlikely that

an increase in the world demand for a country's exports can

be satisfied without an increase in the price of its

exports. The quantity supplied will be a function of the

price. Since demand is also a function of price,

simultaneity exists. If OLS is used in this case it will

yield biased and inconsistent estimators (Goldstein and

Khan,1978).

Binkley and McKinzie, 1981, compared the performance of

OLS, 2SLS, and analytic 2SLS in the estimation of export

demand equations under a variety of circumstances 2:


2In Binkley and McKinzie's analytic 2SLS, domestic demand













(1) Excess supply shifting more than excess demand


(2) Excess demand shifting more than excess supply


(3) Both curves shifting.


Their conclusions as to which estimator to use were based

upon which situation was prevailing. If excess supply was

more variable than excess demand, then OLS was the preferred

estimator, even if it is biased and inconsistent. Excess

supply is domestic supply less domestic demand. The

unexplained variation in excess supply, therefore, is the

unexplained variation in domestic supply and demand. The

variation in excess demand is composed of variation in

supply and demand for all other countries. One would

expect, in international trade, the variation in excess

demand to exceed that in excess supply. If that is indeed

the situation, then analytical 2SLS is the preferred

estimator while the direct estimation of export demand by

2SLS is acceptable.

Nevertheless, it has been common practice among

economists to use OLS in estimating the demand equations for

a nation's exports. To compare the results of this type of

work to those obtained using a simultaneous approach,

Goldstein and Khan estimated demand and supply functions for


--------------------

and supply were estimated with 2SLS and the export demand
function was obtained by subtraction.









58

a nation's exports simultaneously (Goldstein and Khan,1978).

They did this for eight countries. Their results indicated

that export price elasticities of demand are probably

considerably larger than those obtained using OLS. However,

the estimated income elasticities tended to be very similar.

Their results also indicated, using a Koyck-type distributed

lag model, that adjustment of exports to changes in the

independent variables was neither instantaneous nor very

long, usually less than one year.

Because the income elasticities of demand estimated

by OLS were very similar to those estimated using

simultaneous techniques, conclusions of studies estimating

income elasticities of demand using OLS are probably

accurate. Houthakker and Magee estimated demand

elasticities for both imports and exports with respect to

income and price (Houthakker and Magee,1969). Their main

emphasis was on the importance of the income elasticity of

demand. It has been demonstrated that if trade is initially

balanced in a two country model, if prices are constant and

if income growth is the same in both countries, then the

trade balance between them can still change through time if

their respective income elasticities of demand for the

other's exports differ (Johnson, 1958).

Houthakker and Magee found that there is a wide

disparity between the income elasticities of demand among

developed nations for manufactured goods. They also found









59

that these differences do have a significant effect on

international trade, both in terms of direction of trade and

balance of payments. Their study focused on U.S. trade in

general, with more emphasis on manufactured goods than

agricultural products. However, the income elasticity is as

equally important in agricultural trade as in trade of

manufactured goods. Examination of the differences in

income elasticities for vegetables among nations could

reveal an underlying force acting on the directions and

strengths of trade in that commodity.


Present Study


The present study is a world trade model for fresh

vegetables which simultaneously estimates market and product

demands export supply equations, and CIF import prices for

each trader. It follows Armington's utility tree approach;

total market demand for vegetables within each trading

region is determined and independently allocated among

competing sources of supply, or vegetable products.

Therefore, there are market demands, product demands, export

supply equations, and CIF import price equations for all the

major world traders contained within the model. Domestic

sales of products as well as trade flows from every region

to every other region are determined by the model.

Estimation of the demand, export supply, and price equations

will be done using a simultaneous technique.









60

Highly aggregated data are used, both for commodities

and regions. However, unlike Winters' data, the regions

were aggregated specifically for this study. All countries

within a region have similar trade patterns in fresh

vegetables and face similar trade preferences or barriers.

Unit value data are used for prices. These data

characteristics may lead to similar problems as those faced

by Winters in his study of developing countries'

manufactured exports. However, when dealing with

international trade, it is very difficult to obtain anything

other than highly aggregated commodity data or unit value

price data. Also, when estimating a world trade system, it

is necessary to aggregate countries into regions in order to

make the problem of a reasonable scope.

The use of a systems estimation technique will yield

estimated parameters that are less biased than if ordinary

least squares was used. Also, the estimated export price

elasticities will be much higher than if they were estimated

with ordinary least squares. They will be more accurate

estimates, according to the study by Goldstein and Khan, and

thus any analysis based on these estimates will also be more

accurate.

Analysis of the demand parameters will indicate the

likely future directions of trade. Estimated price and

income elasticities can be used to pinpoint some of the

forces operating in world vegetable trade, both currently









61

and in the past several years. These forces will likely

push it in the near future. For example, the price

elasticity of demand in the E.E.C. for Mid-Eastern

vegetables might currently be considerably lower than that

for U.S. vegetables. This would indicate that if both Mid-

Eastern and U.S. vegetable exports to the E.E.C. were to

increase in price by the same amount, the E.E.C.'s demand

for U.S. vegetables would drop more than it would for Mid-

Eastern vegetables. Price elasticities can be used to

understand the relative effects of price changes on trade

patterns. Likewise, income elasticities of demand can be

used to understand'the relative effects of income changes on

trade patterns. Also, as discussed earlier, if income

elasticities differ between two countries, their trade

balance can change over time even if prices remain constant

and income growth is the same in both countries. Income

elasticities can give some measure of the relative strengths

of demand between countries and some idea of the likely

future trends in trade between them.

In summary, a world trade model based on Armington's

"Theory of Demand as Distinguished By Place of Production"

is constructed for world vegetable trade. It contains

market and product demands, export supply equations, and CIF

price equations for every major trader. Estimation of the

model will be done with a systems methodology, thus

eliminating simultaneous equations bias. Results of









62

estimation can be used to understand the forces driving

international trade in vegetables. The parameter estimates

can be used to forecast vegetable trade in the near future

and to simulate vegetable trade with shocks in the more

important exogenous variables such as regional incomes,

population levels, production levels, and tariff barriers.
















CHAPTER IV


THEORETICAL TRADE MODEL FOR FRESH VEGETABLES


Introduction


In this chapter a simultaneous system for world trade

in fresh vegetables will be presented. In the introduction

the general approach of the model's construction and

implementation are set forth. The second part of the

chapter discusses the model's theoretical basis. The third

presents the model in a general manner while the fourth

section gives the specific functional representation of the

system, essential for estimating the complete system. The

final section of the chapter discusses implications and uses

of the model.

The model is designed to determine the overall demand

or market for vegetables in each of the major trading

regions, and to measure the allocation of products in these

markets from competing suppliers, or to measure product

demands and calculate market shares. The approach taken,

that of measuring the market demand for vegetables in each

major participating region and then allocating these demands

to the world vegetable suppliers, is based on the

fundamental assumption that products produced in different









64

regions are distinguishable, they are not perfect

substitutes. They do, however, remain within the product

group defined as fresh vegetables. Therefore, one region's

market for vegetables is likely to be composed of demands

for vegetables produced in several distinct regions. The

strength of these individual product demand functions is

largely determined by the size of the market for vegetables

in the demanding region and the price of the product

relative to the average vegetable price in the market. The

size of each region's vegetable market is affected by many

variables with the most important including national

incomes, average vegetable prices in the region, population

levels, and the prices of substitute goods. This is

consistent with basic economic theory which postulates that

demand for an agricultural commodity is a function of

income, price of the good, population and the prices of

substitute goods. Other variables also affect demand, but

they are secondary to these primary variables.

The theoretical groundwork for a model which

distinguishes products by place of production was laid by

Armington (1969). His work made use of relevant, reasonable

assumptions in order to simplify product demand functions

which are distinguished by place of production to the point

where they could be feasibly estimated. Although simplicity

to allow for empirical application was one of his goals,

neither Armington nor researchers applying his methodology

have fully exploited the potential empirical usefulness of









65

models which distinguish products by place of production.

Thus far, empirical implementation of Armington's work has

generally been limited to using single equation estimation

techniques (Artus and Rhomberg,1973; Sarris,1983). The

exception to this was Winters' study of developing

countries' manufactured exports (Winters,1984a). He

estimated the demand and supply of these exports using both

single equation and systems techniques.

A primary goal of this research is to estimate a world

vegetable trade model which distinguishes products according

to their region of production using appropriate systems

estimation procedures. Given that, in general, demand and

supply are determined simultaneously, demands for products

distinguished by place of production would be determined

simultaneously with their supplies through the price

mechanism. Estimation of these demands with single equation

techniques would yield biased and inconsistent parameters.

Use of a simultaneous, or systems, estimation technique will

more fully exploit the mathematical attributes of

Armington's theoretical work than would a single equation

technique and will yield consistent parameter estimates.


Theoretical Basis of Model


As discussed in the introduction, the theoretical

groundwork for the model used in this dissertation was laid









66

by Armington (1969). In Armington's theoretical framework,

the distinction between goods and products is an important

one. The term good characterizes a class of items such as

vegetables, or meats. A goods category is composed of

products which are distinguished by their place of

production. The goods category of vegetables used in the

world vegetable trading system is composed of those

produced by the major vegetable suppliers of the world,

Latin America, the United States, Canada, the E.E.C., the

Middle East, the Far East, Africa, and the Non-E.E.C.

Western European nations. The products within a goods

category are not perfect substitutes but are close enough to

remain in the same product group.

Armington makes use of two crucial assumptions in order

to develop a theory which determines the market demand for a

good and allocates it to competing suppliers. First,

demands for products within each good's market are

independent of those demands for products in other good's

markets; thus it is possible to distinguish markets for

goods. Second, as long as the prices of products within a

goods market remain constant relative to each other, the

shares of those products of the total good's market are

unaffected by changes in the size of that market.

Therefore changes in prices for products in one good's

market have no effect on market shares in other goods'

markets and the prices of competing goods affect product









67

demands in other good's markets only indirectly through

their influence on the sizes of these markets.

An important issue in a model which distinguishes

products by place of production, none of which are perfect

substitutes, is the degree of substitutablity which does

exist between products. Trade theories and models generally

assume that products of the same type produced in different

regions are perfect substitutes and therefore have infinite

elasticities of substitution. The model used in this

analysis, built on Armington's work, assumes that products

of the same kind produced in different regions are only

imperfectly substitutable. The degree of substitutability

must be estimated. With a large number of products, there

would be an inordinate number of parameters to be estimated

if no limits were placed on their substitutability.

Due to the geometrically increasing number of

substitution parameters as the number of regions increases,

some limiting assumptions concerning product

substitutability are necessary in order to make the model

empirically feasible. Armington's theoretical work assumes

that the elasticities of substitution between competing

products is constant, not dependent on market shares, and

that any two products competing in the same good's market

have the same elasticities of substitution. Thus there is

only one elasticity of substitution for each good's market.

These are very restrictive assumptions and can be relaxed









68

somewhat by assuming that the ratio of the elasticities of

substitution for all of the products competing in a good's

market must vary by a constant proportion but the

substitutability between every product is not necessarily

identical (Artus and Rhomberg,1973). Either way, these

assumptions impose restrictions on the system which limit

the number of parameters to be estimated and greatly

facilitate the estimation process.

The validity of the above assumptions depends to a

great extent on the differentiability of the products. In

the system developed for world vegetable trade, vegetables

are distinguished solely by place of production, not by

vegetable type. Throughout the model all vegetable types

are aggregated into a single vegetable category and

vegetable products are distinguished by place of

production. This representation of vegetables and vegetable

products tends to minimize the potential differentiability

which exists among vegetables. However, there are some

factors which could lead to marked differences between the

vegetable products of the supplying regions, one of the most

important being quality levels. Marked quality

differentials could exist between vegetables produced in

different regions due to production techniques, soil

characteristics, and quality control regulations on exports.

Given that the quality levels of vegetable products of

the supplying regions could differ, the assumption that all









69

vegetable products have the same elasticity of substitution

is unduly restrictive. A more realistic approach appears to

be to assume that the elasticities of substitution between

any pair of competing products vary by a constant

proportion, but the substitutability between every product

is not necessarily identical. This framework would allow

for those suppliers who produce unusually high or low

quality vegetables and those whose products are

distinguishable, but not highly differentiated.

The use of either of these assumptions places specific

restrictions on the types of functional forms that can be

used. In the case of the first set of assumptions, a

constant and uniform elasticity of substitution between

competing products, a CES, constant elasticity of

substitution, technical relationship is imposed on the

system. In the case of the second assumption, a constant

ratio of elasticity of substitution between any pair of

competing products, without restricting the substitutability

to be the same between every product, a CRES, constant

ratios of elasticity of substitution technical

relationship is imposed on each vegetable market (Artus and

Rhomberg,1973). The imposition and functional nature of

these technical relationships determine the functional forms

of the product demand and market share functions.3



--------------------

3This is demonstrated quite clearly in part I of the
appendix to Armington, 1969.









70

Generalized Trade System


Before turning to the specific nature of the

substitutability among products, it is useful to present the

generalized trade system that will be adopted for the

current vegetable trade study. Accordingly, a schematic

representation is set forth for a two region world with two

way trade which illustrates the causal relationships between

prices and quantities. The model as presented in this

section draws heavily from Armington and Sarris' earlier

references. However, unlike-their work, the final specified

model will be estimated as a simultaneous econometric system

of equations.


Initial Schematic Representation


An initial schematic representation of the simple two

region model is presented in Figure 4.1. For the sake of

clarity only one good, vegetables: two regions, 1 and 2,

and two suppliers, 1 and 2, are considered. Let:


X(1.)

X(2.)

X(.1)



X(.2)


X(11)


= the demand for all vegetables in region 1

= the demand for all vegetables in region 2

= the total supply of vegetables produced in
region 1; in this trade system it is
constrained to equal world demand for
vegetables produced by region 1.
= the total supply of vegetables produced in
region 2; in this trade system it is
constrained to equal world demand for
vegetables produced by region 2.

= the demand in region 1 for vegetables produced
in 1




























































X I


X(.2) ;;.


FIGURE 4.1

SCHEMATIC REPRESENTATION OF WORLD TRADE SYSTEM FOR
FRESH VEGETABLES.











X(12) = the demand in region 1 for vegetables produced
in 2
X(21) = the demand in region 2 for vegetables produced
in 1
X(22) = the demand in region 2 for vegetables produced
in 2

X(.l) X(11) = the export supply of vegetables
produced in region 1
X(.2) X(22) = the export supply of vegetables
produced in region 2

P(1.) = the average market price paid in region 1 for
vegetables
P(2.) = the average market paid in region 2 for
vegetables

F(.1) = the average free on board export price for
vegetables produced in 1
F(.2) = the average free on board export price for
vegetables produced in 2

P(11) = the price in region 1 for vegetables produced
in 1. It is assumed to equal the average FOB
export price for vegetables produced in region
1.
P(12) = the market price in region 1 for vegetables
produced in 2. This price includes the costs
of tariffs, non-tariff barriers, preferential
treatments, and the costs of insurance and
freight.
P(21) = the market price in region 2 for vegetables
produced in 1. This price includes the costs
of tariffs, non-tariff barriers, preferential
treatments, and the costs of insurance and
freight.
P(22) = the price in region 2 for vegetables produced
in 2. It is assumed to equal the average FOB
export price for vegetables produced in region
2.

F(12) = the FOB export price of vegetables produced in
region 2 and demanded in 1. It has not been
adjusted for tariffs, non-tariff barriers,
preferential treatments or the costs of
insurance and freight.

F(21) = the FOB export price of vegetables produced in
region 1 and demanded in 2. It has not been
adjusted for tariffs, non-tariff barriers,
preferential treatments, or the costs of
insurance and freight.









73

Figure 4.1 represents a two region world with two way

trade. Each of the market demands for the single good,

vegetables, X(1.) and X(2.), are filled by the supplies

produced by regions 1 and 2; X(11) and X(12) supply region

l's demand for vegetables while X(21) and X(22) supply that

of the second region. In this system supply is constrained

to equal demand so that the total amounts supplied by

regions 1 and 2 equal the total demand for their products,

or:


X(.1) = X(11) + X(21)


and


X(.2) = X(12) + X(22).


The total supply of a region is assumed to be a function of

the previous period's production and is thus exogenous.

Export supplies are, however, a function of the average FOB

export price and are determined simultaneously by the

system. Also, the product being fresh, it is assumed to be

non-storable except for short time periods.

Prices are the crucial linking and determining

mechanism serving to allocate products so that supplies

equal demand on both the product and good level. For each

product there is not one relevant price, but seven, all of

which are functionally related. Taking X(.2) as an example,

the relevant prices are F(.2), P(22), P(2.), P(12), C(12),









74

F(12), P(1.). The average FOB price of the product, F(.2),

is determined by the interaction of region 2's export supply

of the product and world demand less domestic demand for

X(.2). The CIF regional import prices will differ from

F(.2) according to the quality levels of the vegetables sold

to each region, the market structure of the import

companies, the costs of insurance and freight, and non-

tariff barriers. F(12) is the FOB export price of the

product produced in region 2 demanded by region 1. C(12) is

the price to region 1 after adjusting for all the factors

discussed above. Note that the CIF prices are not

specifically represented in Figure 1. P(12) is the market

price in region 1 for region 2's product. It has been

further adjusted to include the costs of tariffs, and

preferential treatments. The average price of all products

consumed in region 2, imported and domestic, is represented

by P(2.); that for region 1 is P(1.). The sizes of the

vegetable markets in regions 1 and 2 are heavily influenced

by P(2.) and P(1.). Clearly the system is one where demand

and supply are determined simultaneously through the price

mechanism, with both prices and quantities of products and

goods as endogenous variables.


General Functional Representation


Within this framework for trade in fresh vegetables,

there are several relationships operating to equilibrate









75

product and good demand and supply. Their most general

functional representations are discussed below; more

explicit functional forms will necessitate making

assumptions regarding the substitutability between products.

Using i to represent the demanding region and j to

represent the supplying region, where i = 1,2,...,8 and j =

1,2,...,8 so that all regions are included in the

specifications, the markets for vegetables, or the good's

demand functions, for each region can be represented as:


(4.1) X(i.) = f{ P(i.), GDP(i), Pop(i)


where


X(i.) = the demand for vegetables in region i

P(i.) = the average market price of vegetables in
region i

GDP(i) = the gross domestic product in region i. This
is a variable accounting for national income.

Pop(i) = the population of region i. As the population
of a region increases, it would be expected
that its demand for fresh vegetables would
increase.


The general functional nature of (4.1) is a

manifestation of the underlying theory; market demands for

vegetables are functions of the average vegetable price in

the region income, and population levels.

No specific variable in (4.1) represents the prices of

substitute goods. The CPI for the demanding region, CPI(i),

could be used for that purpose but it is not for several









76

reasons. The first is that the CPI is an index for all

prices facing the consumer. Agricultural commodities make

up a small portion of total consumption in a region.

Therefore, use of the CPI would insert a great deal of

extraneous information into the system. The second reason

is that because the vegetable category being used in this

study is highly aggregated, it is likely that any substitute

for a particular type of vegetable is found within the

aggregation. In general, other types of foods, such as

meats and dairy products, are not substitutes for

vegetables. The third and final reason is that regional

CPIs and populations are highly correlated and population

levels are included in the market demand equations.

Therefore any explanatory power the CPIs might have is

probably captured by the population variables.

Product demand functions are represented as:


(4.2) X(ij) = f{ X(i.), P(ij)/P(i.) }


where


X(ij) = the ith region's demand for vegetables produced
in j

P(ij) = the price in the ith market for vegetables
produced in j


These product demand functions, represented generally

by (4.2), reflect the theory of demand for products

distinguished by place of production in that prices for








77

products in goods' markets other than vegetables can have no

effect except through the size of the vegetable markets.

Product demands in a particular region are functions of the

size of the vegetable market, or good market, and the ratio

of the product price to the average vegetable price in that

region.

Market share functions, representing the share of a

vegetable market supplied by a particular product, can be

derived from product demand functions, as illustrated in

equation (4.3):


(4.3) X(ij)/X(i.) = f{ P(ij)/P(i.)


The world vegetable trade system used in this

dissertation is constrained to be in equilibrium; demand for

vegetable products must equal the supply. This restriction

is imposed through:


(4.4) X(i.) = Zj X(ij)


(4.5) X(.j) = Ei X(ij)


where


X(.j) = the total amount supplied by region j in period
t.


Equation (4.4) states that the supply of products in

region i, from whatever origin, equals the demand for

products in region i. Equation (4.5) imposes the








78

constraint that the supply of product from j must equal the

demand for the product from j. These two sets of equations

restrict the system to be in equilibrium; there is no excess

demand or supply.

The export supply of a product is assumed to be a

function of the average export price of the product and the

production level. It is defined as production less

domestic demand where production is considered exogenous to

the trade system. Export supply is represented as:


(4.6) X(.j) X(jj) = f{F(.j),X(.j)}


where


Domestic demand is defined as:

(4.7) X(jj) = { X(.j) 1i X(ij)}

and

F(.j) is the average FOB export price


This specification follows the basic economic theory of an

upward sloping supply curve; the amount supplied for export

is a positive function of its price.

The average export price of a product is not the price

paid by the consumers in the demanding regions. Before

reaching the final consuming market, each product incurs

insurance and transport costs and perhaps tariff and non-

tariff barrier costs. There are several relationships in

the model linking export, import, and market prices.










The average free on board, FOB, export price is

represented as:


(4.8) F(.j) = Ei F(ij)X(ij) / X(.j) ] = F(jj)


where


F(jj) = the domestic price of product j. A product
produced and consumed domestically does not
incur costs associated with shipping and
barriers to entry. It is therefore assumed to
be equal to the average of all FOB export
prices for that producing region.

F(ij) = the FOB export price of vegetables produced in
region j and demanded in i. It has not been
adjusted for tariffs, non-tariff barriers,
preferential treatments, or the costs of
insurance and freight.


Regional differences in CIF import prices of products

due to costs of insurance and freight and other

nonquantifiable variables such as quality levels, non-tariff

barriers, and market organization of importing companies are

accounted for with:

(4.9) C(ij) = f{ F(ij), Year }


where


C(ij) = the import price reflecting the costs of
insurance and freight, or the CIF, import price
for the product exported from region j to the
ith market.


The CIF import prices are adjusted for the costs of

tariffs and preferential treatments with:


(4.10) P(ij) = {( 1 + T(ij) ) C(ij) }












where


T(ij) = the costs of tariffs and preferential
treatments between importing to region i and
from exporting region j, expressed in
percentage terms.


The average prices paid for vegetables in region i is

defined as:


(4.11) P(i.) = j P(ij) X(ij)/X(i.) }


Given that this is an international trade model,

exchange rates play a role in the allocation process.

Depending on the value of a national currency with regards

to another, the prices of each of those countries' products

to each other will vary. Exchange rates are taken into

account in this model by conversion of all price and income

data to one currency, the U.S. dollar. The exchange rate of

each of the countries' currencies with regard to the U.S.

dollar is taken into account on a year by year basis. Thus

the yearly price and income data used in the estimation of

the model have exchange rate fluctuations built into them.

There is no need to explicitly account for exchange rates in

the functional forms of the equations.









81

Specific Functional Representation


Assumptions Regarding Product Substitutability


In order to specify the equations of the simultaneous

system in more specific functional forms, assumptions must

be made regarding product substitutability. As discussed

earlier, the assumption of a constant and equal elasticity

of substitution between all products in a market, embedded

in the CES function, while being one alternative, may be

overly restrictive. Restrictions on the elasticities of

substitution which force them to vary by a common, constant

proportion, yet allowing for differences in

substitutabilities between products within a market, are

embedded in the CRES function. These restrictions are

reasonable in regards to vegetable trade. Restrictions are

placed on product substitutability, reducing the number of

parameters to be estimated, and yet some flexibility in

substitution is retained. For these reasons, the CRES

technical relationship will be imposed on the system. This

will be reflected in the functional nature of the product

demands. The imposition of the CRES technical relationship

determines the functional nature of the product demands and

market shares from competing supply regions. The other

relationships set forward in the general representation of

the trade system, the supply and price relationships, as

well as the supply and demand restrictions, are unaffected

by the use of the CRES function.








82

The CRES functional form of the demands or markets for

vegetables for each region i and j is represented as:

(4.12) X (i.) = j{j (ij) X(ij)a(ij) }(l/a(i.))

Given (4.12), it can be shown that the product demand

functions are represented as:4

(4.13) X(ij) = { ( ( P(ij)/P(i.) )(/(a(ij)-l))

(a(i.)/a(ij) B(ij)))(1/(a(ij)-1)) X(i.)((a(i)
-1)/(a(ij)-l))I


The resulting market share equations are:

(4.14) X(ij)/X(i.) = { ( P(ij)/P(i.) )n(ij)

(a(i.)/a(ij) B(ij) )7(ij) X(i.)})((ij)
(a(i.)-1)-1)


where

a(ij) = 1 / (1 a(ij))

and

r(ij) = 1 /(a(ij) 1)

o(ij) = elasticity of substitution

o(ij) = a(ii) a(ij) /Zj S(ij) a(ij)

S(ij) = P(ij) X(ij) /Zj P(ij) X(ij)





4The functional form for the product demand is derived from
the CRES market demand in Appendix D. The derivation
closely follows that used by Armington for the CES market
demand.