ABSTRACT
This chapter is concerned with deriving testable predictions of the short-run relationship between domestic demand and exports at the firm level. It shows that different predictions can be obtained according to the assumptions made about the objectives of the firm and its market and cost conditions. The authors found this analytical exercise invaluable, since it provided a logical framework for the project and it improved our understanding of the hypothesis. The orthodox model of the firm as a profit-maximizer predicted that the short-run relationship between exports and domestic demand might be negative, positive or even zero – the actual prediction depending upon the firm's market and cost conditions. The chapter explores the pressure hypothesis in greater detail by trying to identify the various conditions under which a decline in a firm's domestic sales would actually be associated with a favourable effect on exports.
