Sensitivity of Exports to Change in Relative Prices and Nominal Exchange Rate: Case of Manufacturing Exports of Sri Lanka

In 1950, Orcutt argued that ‘trade flows respond to changes in nominal exchange rate faster than relative prices’. Subsequently empirical studies have tested this hypothesis and found mixed results. The experience of Sri Lanka, where it has been encountering a relentless fall is the share its exports global trade during past decade, provides an ample motivation test ascertain which policy instruments would stimulate export performance faster. This study tests Orcutt’s conjecture on Lanka six major trading partners, using annual data for period 1970 -2019. Since mix I(1) I(0), Autoregressive Distributed Lag (ARDL) technique employed incorporate dynamic adjustments prices rate. findings indicate that, short run, only rate, but does not prices. long run however, both price impact are relatively higher short-run long-run. analysis consistent with suggest be more appropriate instrument promote country.