An Empirical Study on the Different Effects of Income and Price Elasticities in the Korean Goods and Services Account Balance

In this paper, we estimated the export and import demand functions of the Korean goods and services account using quarterly data from 1990 to 2006. We found that there exists an obvious difference in income and exchange rate elasticities on Korean exports and imports, and clearly showed that the difference is asymmetric for the goods and services trade. We confirmed the existence and kinds of changes in the estimated coefficients over time and the structural changes in income and exchange rate elasticities occurring from 1995 and the end of 1997, respectively. Interestingly, this phenomenon corresponds to the time of the trade expansion with the help of the Uruguay Round of multilateral trade negotiation and that of the financial crisis. These results imply that Korea has a comparative disadvantage in the services sector, and the current account of Korea is expected to be negatively impacted by an increase of the services trade deficit resulting from an additional expansion of trade focused on the services sector. Therefore, it is strategically necessary to bring up the services sector. Throughout the set of strategies, strengthening competitiveness in the quality of services will be the most significant issue.