1 𝛼

log(𝐼𝑡∗ ) = 𝑐 − log(𝑝𝑡 ) + log(𝑑𝑡∗ ) + 𝜖𝑡 (3.22)

𝛽 𝛽

Where 𝑐 = (1⁄𝛽 )(𝑏0 − 𝑎0 ), 𝜖𝑡 = (1⁄𝛽 )(𝜖𝐵,𝑡 − 𝜖𝐴,𝑡 ), and 𝐼𝑡∗ = 𝑥𝑡 , that is

ROW’s import demand (It*) equal to export demand from home country (𝑥𝑡 ). Notice

that in the original specification, 𝑑𝑡∗ = 𝐺𝐷𝑃𝑡∗ − 𝑥𝑡∗ , where 𝑥𝑡∗ are the exports from

ROW. The last step to achieve an aggregate export demand equation is to rewrite

equation 3.22 as:

1 𝛼
log(𝑥𝑡 ) = 𝑐 − log(𝑝𝑡 ) + log(𝐺𝐷𝑃𝑡∗ ) + 𝜖𝑡 (3.23)
𝛽 𝛽

3.1.3 Exchange Rate Risk in Exports

The general assumption, in theoretical models, 4 is that there is a percentage of

risk averse traders, and also perhaps risk neutral, who in view of increased exchange

rate volatility will engage in less international trade as they may not want to put trade

volumes, revenue and/or profits into higher uncertainty (Brodsky (1984)). This action

is independent of whether the risk is borne by exporters or importers (Hooper and

Kohlhagen (1978)). Following the literature, other assumption are made in the

analysis. The forward exchange markets in BRICS countries, Honduras, and Turkey

are still underdeveloped for the analysis period considered, and so traders have not

been locking in currency prices through contracts in the FOREX market to reduce

risk associated with exchange rates. Production decisions are taken at current time for

delivery in a future time for which relative prices (exchange rates) at present moment

4
Exchange rate risk theoretical works are Ethier (1973), Clark (1973), Baron (1976), and
Hooper and Kohlhagen (1978).

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