Page 120 - Azerbaijan State University of Economics

Yadulla Hasanli, Gunay Rahimli, Fuad Quliyev, Mattia Ferrari: Evaluation of Sectoral
Foreign Trade Elasticities of Azerbaijan

whereby, is a parameter representing the efficiency of substituting quantities of

products sold in the export and domestic markets for the i-th production sector,

and are CET distribution parameters, and is used to calculate the elasticity of

substitution between products sold in the export and domestic markets. The elasticity
of substitution between exported and domestic products is then computed as =

1
.
1+

As shown, this is also a conditional optimization problem, and solving it using the
method of Lagrange multipliers allows us to determine the portion of the i-th
production sector’s output that should be sold in the domestic market and the portion
that should be exported. From this solution, the relative volume of exported to
domestic products can be expressed as follows (Annabi et al., 2006):

= ( ∙ ) (6)

Foreign trade elasticities provide crucial information about a country’s economy and
the behavior of consumers and producers, making their estimation an important input
for building general equilibrium and various trade models. Many resource-rich
countries are known to be dependent on resource prices (Shahbaz, M.; Destek, M;
Okumus, I; Sinha, A. (2019); Guan, L.; Zhang, W.; Ahmad, F.; Naqvi, B. (2021)),
including cases where high import volumes result from the reduced competitiveness
of other sectors—a manifestation of the resource curse (Mikesell, R. (1997); Auty, R.
(2014)). Oil- and gas-rich Azerbaijan also faces challenges due to the large share of
the oil sector in its exports, which makes the economy dependent on oil (Czech, K.
(2018); Sadik-Zada, E. (2019); Sadik-Zada, E.; Gatto, A. (2021); Sadik-Zada, E.;
Loewenstein, W.; Hasanli, Y. (2021)), as well as the substantial volume of imports in
the non-oil sector (Seyfullayev, I. (2023)). In recent years, Azerbaijani government
has pursued policies aimed at reducing the economy’s dependence on commodity
revenues and promoting diversification of exports (Aliyev, U.; Guliyeva, G. (2025);
Dadashov, O., (2023)). In this context, a strategic roadmap has been developed,
including a development strategy for 2016–2020, a long-term vision for 2025, and a
target vision for the period beyond 2025.

The main objectives of this roadmap are to diversify Azerbaijan’s economy,
strengthen competitiveness, reduce dependence on oil, increase the size and quality of
non-oil sector exports, and further improve employment levels and the welfare of the
population. During the decision-making process, evaluating elasticity parameters that
reflect the current state of the economy can help in developing different trade policy
scenarios. From this perspective, assessing foreign trade elasticities by dividing the

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