Impact of Exports on the Exporter’s Domestic Market

Abstract

This paper developed a theoretical model of partial equilibrium of the export-oriented market for a short-term period, as well as outlined the main approaches to modeling equilibrium in a long-term period. Thus, the competition between the producers of the selected exporting country and its global competitor in the external import-dependent market is considered. In the partial equilibrium model, for the first time, the domestic and foreign sales markets are presented together. The analysis of the theoretical model made it possible to obtain the following results for the short-term period: in a state close to equilibrium, external supplies of the exporting country are positively related to their own production volumes and negatively – ​with the production volumes of the global exporter; the price of the domestic market of the exporting country is negatively related to the volume of its own production and the volume of production of the global exporter. The paper analyzes three scenarios that allow checking the adequacy of the partial equilibrium model for different conditions of its application. The first scenario considers a negative supply shock associated with a drop in production in a global exporter. The second analyzes the impact of the pandemic on the global exporter and exporting country. The third scenario is devoted to assessing the impact of a demand shock on a designated exporting country. The scenarios confirmed the adequacy of the model. The approach to modeling an export-oriented market for a long-term period is based on the assumption that the exporter's price will converge with the price of the domestic market over time and, ultimately, will differ from it only by the amount of additional costs associated with the export of a unit of production. It was established that, while maintaining exogenous conditions for positive long-term export dynamics, the price of the domestic market of the exporting country will decrease in case of an increase in the incremental values of exports and production volumes of the global exporter. The consequences of the positive dynamics of exports for the domestic demand of the exporting country are considered. The established relationships between exports and sales in the exporter's domestic market were empirically confirmed by the example of the Russian sunflower oil market.