The Study of Korea’s Export Demand Function by Using the Bounds Testing Approach

The purpose of this study is to investigate whether a long-run relationship exists among time series variables and to find short-run elasticities by using an error correction model if cointegration exists in variables. Therefore, this study estimates the demand function of the Korean exports by using bounds testing approach and then compare income elasticity with price elasticity to see which factor has a greater impact on changes to Korea’s exports. We find that the short-run income elasticities are larger than price elasticities. This implies that the change of Korea’s exports in the short-run is more sensitive than the changes in foreign income (industrial production) compared with that of the price (exchange rate). Korea’s exports in the short-run may have a higher export performance on income than that of price (exchange rate). We also find that joining the OECD members in 1995 and the IT bubble in the world economy in 2001 affect Korea’s export demand.