Abstract

India has been witnessing a rapid growth in exports and gross domestic product (GDP). The paper intends to estimate India’s export demand function using bound test approach to cointegration developed by Pesaran et al. (2001) and examines the causal relationship among the variables applying vector error correction model (VECM) model of Granger causality. test using annual time series data for the period 1980 to 2010. The result shows that there is long run equilibrium relationship between demand for export, world income and relative price of export and trade liberalisation. The long run price and income elasticity have been found to be more than the short run price and income elasticity. The income elasticity is more than unity, both in the short run and in the long run signifying the importance of exports as an engine of economic growth. The price elasticity of demand for India’s export has been found to be less than unity in the short run and close to unity in the long run. The Granger causality test reveals that relative price, world income and trade liberalization Granger cause the demand for export, both in the short run as well as in the long run.

Key words: Export demand, price and income elasticity, bound test, Granger causality.