The paper examines the elasticities of export demand for the Philippines using Johansen time series technique. The results of the study suggest that the income elasticity of exports is unity and the relative price elasticity is significant with expected sign. These long run income and relative price elasticities have important implications for export growth policies.

The aim of this study is to examine the long run income and price elasticities of export demand in the Philippines using the Johansen Maximum Likelihood (JML) technique. The export demand is one of the heavily researched topics in macroeconomics because the income and relative price elasticities have implications for export growth policies. Exports are treated as an engine of growth for those countries where income elasticity of exports are high. However, some countries have high price elasticity implying that their exports are more competitive in the world market and a real devaluation will be effective in boosting export revenue. It is important to have high export earnings so that foreign exchange reserves are sufficient to finance imports and capital accumulation. Further, the long run elasticities of exports are vital to analyze the real exchange rate fluctuations on the trade balance.

There are limited empirical studies on export demand for the Philippines.The most influential study is that of Senhadji and Montenegro (1999). They used Phillip Hansen's Fully Modified Ordinary Least Squares (FMOLS) method and found that the income and price elasticities of export demand for the Philippines is 1.20 and -1.24 respectively for the period 1960-1993. The major limitation in Senhadji and Montenegro (1999) study is that exchange rate is excluded in the relative price variable. According to Rao and Singh (2007), the income and price elasticities are either overestimated or underestimated if the exchange rate is excluded from the relative price variable. Barns (2003) estimated the export and the import services equations for the Philippines from 1981 to 2000. He used Ordinary Least Squares (OLS) method and obtained an income elasticity of 2.8. The income elasticity is overestimated because he ignored the relative price variable in his estimation. In a recent study, Razmi and Blecker (2006) estimated the export demand equations for the developed and developing countries using two-stage and three-stage least squares methods. For the Philippines, they used data for the period 1983-2001 and obtained income elasticity around 1.5. The relative price estimate is not given for the Philippines.

Income and Price Elasticities of Exports in Philippines, Johansen Maximum Likelihood, JML, Fully Modified Ordinary Least Squares , FMOLS, Ordinary Least Squares, OLS, Elliot-Rothenberg-Stock, ERS, Time Series Econometrics, International Monetary Fund.