The main purpose of this study is to explore the relationship between real income, price ratio, exchange rate and International trade in Taiwan. The Vector autoregression method and the dynamic method are applied to study the relationship between international trade and its determinants. The data applied are quarterly ranging from the first quarter of 1990 to fourth quarter 2010.
The vector autoregressive model results indicate that U.S. real income lag behind Taiwan's exports to five quarters, price ratio and exchange rate lag behind Taiwan's exports to six quarters. Other results indicate that Taiwan real income lag behind Taiwan's imports to five quarters, price ratio and exchange rate lag behind Taiwan's imports to three quarters.
The export equation results indicate a significant negative effect of the price ratio on Taiwan exports and a significant positive effect of the U.S. real income on Taiwan exports. The import equation results indicate a significant positive effect of the Taiwan real income and exchange rate on Taiwan imports. This study discusses the implication for the theory and practices, and suggestions for the future study.
