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Identifying Supply and Demand Elasticities of Iron Ore

By Zhirui zhu

This paper utilizes instrumental variables and joint estimation to construct efficiently identified estimates of supply and demand equations for the world iron ore market under the assumption of perfect competition. With annual data spanning 1960-2010, I found an upward sloping supply curve and a downward sloping demand curve. Both of the supply and demand curves are efficiently identified using a 3SLS model. The instruments chosen are strong and credible. Point estimation of the long-run price elasticities of supply and demand are 0.45 and -0.24 respectively, indicating inelastic supply and demand market dynamics. Back-tests and forecasts were done with Monte Carlo simulations. The results indicate that 1) the predicted prices are consistent with the historical prices, 2) world GDP growth rate is the determining factor in the forecasting of iron ore prices.

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Advisor: Gale Boyd | JEL Codes: C30, Q31 | Tagged: Demand, Iron Ore, Supply, Simulation, Simultaneous Equation

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