Optimising and Non-optimising Balance of Trade Models: A Comparative Evidence From India

Abstract

This study estimates and compares the competing optimising and non-optimising balance of trade models using Indian data. The results obtained from the optimising model suggest that the prices relative to user cost of capital and the real wealth lead to a deterioration, while the real capital stock results in an improvement in trade balance. The estimates of conventional non-optimising balance of trade model show the significant effect of domestic income and real exchange rate and the insignificant effect of world income on the balance of trade. The error correction models reinforce the long run estimates and show the significant effect of lagged equilibria on the balance of trade. The non-nested hypothesis tests provide mixed evidence for the preference of one model over the other. The J test suggests that the optimising model outperforms the non-optimising model, while the F test shows that both these models are acceptable in explaining the balance of trade.