Export supply, capacity, and relative prices

In the neoclassical approach to specifying an export supply equation, relative prices and capacity are assumed to play a crucial role in domestic firms'decisions to supply exports. In the Keynesian approach, the willingness of domestic firms to supply foreign markets is considered to be largely a function of domestic demand pressure. Keynesian analyses do not allow for the impact of relative prices. This paper blends the two approaches in a model,in which a firm is assumed to choose, first, the level of productive capacity and, then, one period later, to determine production and allocation between foreign and domestic markets on the basis of realized prices, demand conditions, and installed capacity. The conclusion: both prices and capacity are significant determinants of export supply.