| dc.description.abstract | To correct balance of payments disequilibria many developing
countries are experiencing, attention is focussed on visible
trade deficit because capital markets are almost non-existent,
capital mobility is strictly controlled and service trade is
underdeveloped. Economic theory recommends devaluation if quicker
response is needed and the destabilizing effects of contraction
of money supply is to be avoided. Results of Marshall-Lerner
condition test of some empirical studies indicate that
devaluation may not be effective in developing countries thus
making policy makers pessimistic on its use.
This study resolves the contradiction between theory and
empirical findings by using modified assumptions of Marshall-
Lerner condition which suit developing economiea. It studies the
stability of price elasticities of demand for imports in the
Tanzanian economy during the period 1954-1981 with respect to
changes in trade policy during the period. The study takes a
trade defici t as t.he initial condi tion and denominates all trade
in local currency. Lagged regression models are used to capture
the delay between price change and response for both exports and
imports. Real producer prices and quan t i ty of agricultural export
crops produced are used. For imports, relative unit value and
quantity of commercial imports are used.
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The study finds that elasticity of supply of exports are
positive 0.68 with a standard error of 0.247. Elasticity of
demand for"imports are positive, long-run two year elasticity is
\
1.156 with standard error of 0.399 and for period 197~-1981, the
three year elasticity is 1.528 with a standard error of 0.599.
Trade policy and abnormal rise in prices of petroleum products
had no effect on the elasticities. For devaluation to be
effective if the response of only exporters is to be relied on
the ratio of value of imports to value of exports has to be less
than 1.2. If the response of only consumers of imports is to be
relied on, the ratio should be less than 1.9.
The findings confirm the potential for devaluation to
correct a trade deficit in Tanzania. | en_US |
