Abstract:

The majority of foreign trade theories based on neo-classical tradition assumes the homogeneity of consumer preferences across the analyzed countries. The identical and homothetic preferences across countries does not contribute to trade flows, these are than explained solely by differences in the production side of the economy. The development in demand system methodology enables to incorporate the influence of demand side factors, mainly income and price levels, into the foreign trade models. The paper overviews the original and modern approaches to demand side explanatory factors and discusses the consequences of typically used restrictions. The empirical analysis demonstrates the selected impacts of demand side factors to foreign trade flows using the LES demand system above all. The paper focuses to post-transition economies of Central Europe and compares the results with the other EU members. Finally, the counterfactual volume of trade experiment is evaluated to assess the predicted data with respect to statistics of foreign trade flows.