Papers of BAS, Humanities and Social Sciences

Vol. 2, No 1-2, 2015

ECONOMICS

ELASTICITIES IN BULGARIA’S FOREIGN TRADE

Victor Yotzov

Abstract: In recent decades, we witness an increase in global economy growth rates. Most often this process is measured by comparing the growth rates of trade to those of production, which shows this ratio is gradually but steadily increasing. Although the ratio is a good indicator when measuring the openness of economy (whether global or of a specific country), it may cause confusion when exploring the relation between trade and production (income). Sometimes this ratio is incorrectly deemed equal to in­come elasticity of trade. Certainly, the similarity in the calculation of the two indicators accounts for that, but their economic significance is rather different. Trade elasticities are extremely important in the process of economic policy formulation and more par­ticularly in forecasting of foreign trade flows. Very often debates and different opinions as to whether to conduct one or another foreign trade policy ultimately boil down to a choice among different evaluations of the behaviour of trade elasticities. This article provides a short overview of the increasing and changing role of international trade. It discusses the theoretical foundations and empirical challenges in using models describ­ing trade flows, and more specifically in calculating trade elasticities. It offers estimates of long-run (price and income) elasticity of Bulgarian export and import, and provides recommendations from an economic policy perspective.

Key words: foreign trade; economic policy; trade elasticities