Abstract:
This study examines the link between policy-induced
changes in the relative prices of Mexican and U.S. frozen
vegetables and their shares of the U.S. market. Several
scenarios were examined in order to assess the impacts on
quantities demanded of both U.S. and Mexican produced
frozen vegetables caused by changes in their relative
prices.
An econometric model incorporating a two-stage
budgeting process based on Armington's model of demand for
commodities differentiated by kind and origin was used to
estimate the U.S. demand for frozen vegetables. This was
accomplished by first deriving an overall, or total U.S.
demand relationship for frozen vegetables and then
estimating the U.S. demand relationships for frozen
vegetables by country of origin (U.S. and Mexico). The
relative price elasticities estimated by the model were
used to investigate how changes in the relative prices of
frozen vegetables by country affect the composition of
demand for frozen vegetables in the U.S.
The scenarios examined relative price changes
resulting from different economic and political
developments. These included such things as reductions in
U.S. tariff rates brought about by further trade
liberalization (such as the proposed North American Free-
Trade Agreement), changes in the minimum wage rate in both
countries, and increased technology transfer from the U.S.
to Mexico.
Applying the estimated model parameters to these
scenarios suggested that relative price changes in frozen
vegetables from, say Mexico, not only affected the price
and quantity demanded by U.S. consumers of Mexican frozen
vegetables, but it also affected the price and quantity
demanded of U.S. produced frozen vegetables by U.S.
consumers. Demand for frozen vegetables produced in Mexico
was estimated to be relative price inelastic at -0.6375,
while demand for frozen vegetables produced in the U.S. was
relative price elastic with a value of -1.3445.
According to the model projections, price changes in
frozen vegetables produced in either country tend to have a
greater effect proportionately on the quantity demanded of
frozen vegetables produced in Mexico. This can be
attributed to Mexico's relatively small share of the frozen
vegetable market in comparison to the United States.
The effect of a relative price change caused by a
free-trade agreement, which lowers the price of Mexican
frozen vegetables through tariff removal, would increase
Mexico's market share and decrease the United States'
market share in the U.S. frozen vegetable market. But when
one looks at the quantities of frozen vegetables implied by
these market share changes one discovers that they are
relatively small compared to the total volume of frozen
vegetables in the market.
