ITALY'S FOREIGN TRADE 2012

The performance of the foreign trade of Italy during the last part of year 2012 has been exhibited in positive  terms by the majority of the mass media and politicians in Italy. In particular the  alleged "good" performance has been attributed (at least indirectly) to the financial measures adopted by the government led by Mr. Monti. 

But the value of the trade expressed in monetary units can be better understood if we consider the two factors that compose them:

• the amount (volume) 
• the average unit value (AUV) which is an estimate of the average prices of products exported (imported) in a certain period.

By looking at the data presented by the Istat (Italian National Institute of Statistics) on Italy's foreign trade as well as unit value and volume indices (base year 2005=100) referring to October 2012 results in a useful argument for analyzing the foreign trade. 

In the following plots there are shown the results of some simple statistical analysis conducted on the ISTAT data on foreign trade in the period ott2010-ott2012. 

1. Volumes (Vol) and AUV are expressed as numbers fixed base index (data year 2005 = 100).
2. The analysis of these two variables have been carried on by considering two sub-periods: oct2010:oct2011 and oct2011:oct2012, which in practice allow a comparison between two actors of Italian politics: Mr. Berlusconi and Mr. Monti.
3. The straight lines of the linear regressions applied to series Vol and AUV were tested for significance of differences between their angular coefficients and their intercepts.
4. To compare the values of Vol and AUV in the two sub-periods the signed rank Wilcoxon test has been applied. 
5. To evaluate the presence of trends in the series was used  the Cox-Stuart test (as described in [1,2] ).
6. All the statistical tests were two-tailed and the significance level was fixed at 5%.

1. VOLUMES AND AVERAGE UNIT VALUES

Figure 1. Italy's Export vs. Import: Volumes

Test on slopes and intercepts

Are the slopes equal?

F = 0.000763418. DFn=1 DFd=22

P=0.9782

If the overall slopes were identical, there is a 98% chance of randomly choosing data points with slopes this different. You can conclude that the differences between the slopes are  not significant. 

Since the slopes are not significantly different, it is possible to calculate one slope for all the data.

The pooled slope equals 0.87743

Are the elevations or intercepts equal?

F = 5.84636. DFn=1 DFd=23

P=0.02393

If the overall elevations were identical, there is a 2.4% chance of randomly

choosing data points with elevations this different. You can conclude that the differences between the  elevations are significant. 

Comment at the Figure 1: 

in the two compared periods  the coverage rate (Export / Import) of the Volumes represented by the slope of the linear regressions remained unchanged (0.87). 
During the second period, however there is a significant shift in the upper left of the regression line. This due to the significant decrease in the volume of import in the same period oct2011-oct2012.



Figure 2. Italy's Export vs. Import: Average Unit Value

Are the slopes equal?

F = 1.91779. DFn=1 DFd=22

P=0.18

If the overall slopes were identical, there is a 18% chance of randomly choosing  data points with slopes this different. You can conclude that the differences between the slopes are  not significant. 

Since the slopes are not significantly different, it is possible to calculate one slope for all the data.

The pooled slope equals 1.29806

Are the elevations or intercepts equal?

F = 15.0005. DFn=1 DFd=23

P=0.0007706

If the overall elevations were identical, there is a 0.077% chance of randomly  choosing data points with elevations this different. You can conclude that the differences between the  elevations are extremely significant. 

Comment at the Figure 2: 

in the two compared periods  the coverage rate (Export / Import) of the AUV represented by the slope of the linear regressions remained unchanged (1.29). 
During the second period, however there is a significant upward shift of the regression line.

Figure 3. Italy's Export Volumes: two periods compared

Figure 3 casts some doubt about the fact that during the second period the volume of the exports have increased. Let's see then the following plot:





Figure 4. Comparing the Italy's Export Volumes between the two periods

The statistical test of Figure 4 indicates that there is significant difference in the export volumes between the two periods considered. Specifically, during the first period oct2010:oct2011 the median level of the export volumes resulted higher than the one measured in the second period. 

Maybe the performance of the Italy's export in the last part of 2012 has been determined by the effect of the AUV (Figure 5):

Figure 5. Italy's Export Average Unit Value: two periods compared

The statistical test (Figure 6) confirmed that the export AUV in the second period have been significantly higher than the export AUV in the firts period.

Figure 6. Comparing the Italy's Export Average Unit Value between the two periods

2. TERMS of TRADE (ToT)


The Terms of Trade (ToT) is given by the ratio:

      Price of export / Price of Import 

ToT is an effective indicator of the difference between the average export prices and import prices. Usually an increase in ToT is referred to as an "improvement" as the prices of exports would increase by more than imports. 

But beyond a certain threshold the increase of ToT can introduce bias, because it would favor an increase in the prices of exports and therefore tend to be reduced in volume. On the contrary it tends to favor imports as becomes more affordable.

Since ToT is given by the ratio between the amount of money, it can vary both in function of the relative prices of goods exported vs. imported at the same exchange rate, and in terms of the change in the exchange rate (for example euro vs. U.S. dollars) at unchanged prices of goods. 

So as the relative devaluation of the domestic currency yields benefits in the trade balance, it is necessary that the sum of the elasticities of exports and imports relative to the exchange rate is greater than 1: it is the necessary and sufficient condition described by Marshall-Lerner   [see video below for explanation of the Marshall-Lerner condition].

Here the ToT has been approximated by the ratio: 

AUV Export/AUV Import

Figure 7. Italy's Terms of Trade: two periods compared

The ToT in the period oct2011:oct2012 has resulted greater than in the previous period (Figure 8).

Figure 8. Comparing the Italy's Terms of Trade between the two periods

From Figure 7 it is visible that in the trimester from August 2012 to October 2012 the course of ToT has decreased so as to be indistinguishable from the values observed in the homologous trimester of 2011. That is, also the AUV of import (with respect to the AUV of export) has increased.  


3. THE ADJUSTED TRADE BALANCE


The Adjusted  Trade Balance (ATB) is obtained by calculating the following ratio between exports and imports expressed in monetary values​​:

ATB = 100 * (Export-Import) / (Export + Import)

Hence, ATB takes values ​​between -100 (when the country is uniquely importer) and +100 (when the country is uniquely exporter). If the trade balance is in equilibrium, then ATB = 0.
The performance of the normalized trade balance is increasing if exporting has a growth rate higher than that of imports. In Figure 9 it is drawn the Italy's ATB for the two periods. The results seems to be related to the increasing of the export AUV between oct2010:oct2011 and oct2011:oct2012.

Figure 9. Italy's Adjusted Trade Balance in two periods

4. TESTING FOR THE TREND

The Cox-Stuart test here(Table 2) is used to distinguish the overall performance of trade flows between the two periods. The results are significant, with p value = 0,0156. 

In the first period oct2010:oct2011, there is a growing trend in the trade balance both in terms of volumes and in terms of AUV. Also the course of theToT and ATB have rising trend. In the following period, we note significant trends from the import. Specifically, there is downward trend in import volumes and import growth for AUV.

The main conclusion is that:

neither the first period nor the second period shows trend in the export data. That is, the ramping of the export AUV for both periods as displayed in Figure 5, is not significant.  

Table2. Trend (Cox-Stuart test)

oct2010:oct2011        oct2011:oct2012

Export:Vol                             no                                 no

Export:AUV                          no                                 no

Import:Vol                            no                                  -

Import:AUV                         no                               ­   +

Trade Balance: Vol               +                                  no

Trade Balance: AUV            +                                  no

Terms of Trade                    ­+                                  no

ATB                                       +                                   no


5. CURRENT ACCOUNT BALANCE 

In order to get a better picture of the dynamics of the italian foreign trade it is necessary to wait for the publication of the 2012 Current Account Balance, that in 2011 closed with a deficit of 72 419 millions USdollar (value seasonally adjusted)  [see here  OCSE data set]. See also Figure 10 below.

It is well known, in fact, that a negative balance means that the revenue currency are not enough to cope with the outflow, and if a country needs to import because of the lack of raw materials, necessarily will need to gear to also increase its exports in order to balance the account. In fact, you can not draw on reserves indefinitely. The reserves are likely to run out, and can not be used for commercial deficits of long duration (also called structural).


It is therefore necessary redress the balance, and this can be done in several ways:

1. through the so-called "structural adjustment policies", which basically aim to reduce imports by decreasing domestic demand by lowering the private and public spending, and to boost exports by reducing labor costs. The IMF loans are conditional on the implementation of these policies, which involve a heavy internal crisis for the country that has to bear.
2. a typical solution is to resort to protectionist policies, which make imports more expensive applying customs duties, or by acting indirectly support with subsidies for domestic production so that it is more competitive than foreign products, it may also restrict or prohibit by law the importation of certain goods, in one way or another, this kind of policy can trigger trade retaliation by other countries then make exports more difficult.
3. The interest rate has an influence on the balance of payments, because if the trade is in deficit, raising the official interest rate can attract capital from abroad in search of good returns and redress the balance with a surplus of movement of capital. It should be noted that a rise in interest rates has a depressing effect on the economy of the country, making it difficult investment and credit - which may indeed also be useful for the purpose of balancing the trade balance, because a depressed economy matter less.
4. The solution absolutely typical, in the context of a flexible exchange rate, is the competitive devaluation. Devaluing the exchange rate, you make it more expensive for foreign currencies and therefore imports, while exports become cheaper, so as to balance the scales (In a nutshell: the exchange rate).

Figure 10. Italy's Current Account Balance: period 2005:2012

Source: Bank of ItalyData are reported in billions euro.
After the nineties, starting from 2000, the current account balance recorded deficits again, with an irregular, but tends to get worse. In particular, in 2008, the current account deficit reached 3.41% of GDP, the worst figure since 1981, before falling slightly in 2009 (3.16%).

1. P. Sprent and NC Smeeton, (2001). Applied nonparametric statistical methods,  3rd ed. Chapman & Hall / CRC 
2. W.J. Conover, (1999). Practical nonparametric statistics 3rd ed., John Wiley & Sons, New York