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Import Price-Elastcities: Reconsidering the Evidence

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Author Info
Helene Erkel-Rousse (TEAM-CNRS University of Paris 1)
Daniel Mirza (TEAM-CNRS University of Paris 1)

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Abstract

Recent geography and trade empirical studies based on monopolistic competition [Hummels, 1998; Hanson, 1999; Head and Ries, 1999] suggest high levels of trade price-elasticities (between 3 and 11). However, direct estimations of price-elasticities in trade equations, using price indexes at the aggregate or industry levels, lead to much lower values than those predicted by the prior studies and the theory (usually around unity). In this article, we show that these inconclusive results may be due to an econometric misspecification of the trade equations, to measurement errors in import price indexes as well as endogeneity problems. We re-estimate import price-elasticities from gravity-like equations using methods of transformed least squares and instrumental variables. Our study is based on compatible bilateral trade and activity data from the OECD and INSEE1 for 14 import countries, 16 trading partners, 27 industries and 23 years. When suitable instrumental variables are used, we find relatively high price-elasticities, usually ranging from 1 to 7, the highest estimates corresponding to industries producing homogeneous goods. Our results constitute a first step towards a reconciliation of the theory and the evidence.

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Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 0909.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:0909

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  3. Crozet, M. & Erkel-Rousse, H., 2000. "Trade Performances and the Estimation of Price-Elasticities : Quality Matters," Papiers d'Economie Mathématique et Applications 2000.61, Université Panthéon-Sorbonne (Paris 1).
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  5. Hélène Erkel-rousse, 1997. "Endogenous Differentiation Strategies, Comparative Advantage and the Volume of Trade," Annales d'Economie et de Statistique, ADRES, issue 47, pages 08, Juillet-S. [Downloadable!]
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  8. Bergstrand, Jeffrey H, 1989. "The Generalized Gravity Equation, Monopolistic Competition, and the Factor-Proportions Theory in International Trade," The Review of Economics and Statistics, MIT Press, vol. 71(1), pages 143-53, February. [Downloadable!] (restricted)
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  11. Hall, Robert E, 1988. "The Relation between Price and Marginal Cost in U.S. Industry," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 921-47, October. [Downloadable!] (restricted)
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  15. Grossman, Gene M, 1982. "Import Competition from Developed and Developing Countries," The Review of Economics and Statistics, MIT Press, vol. 64(2), pages 271-81, May. [Downloadable!] (restricted)
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  1. Christine A. McDaniel & Edward J. Balistreri, 2003. "A Discussion on Armington Trade Substitution Elasticities," Computational Economics 0303002, EconWPA. [Downloadable!]
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  2. Lionel Fontagne & Thierry Mayer & Soledad Zignago, 2004. "Trade in the Triad: How Easy is the Access to Large Markets?," Working Papers 2004-04, CEPII research center. [Downloadable!]
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  3. Sebastien Jean, 2000. "The Effect of International Trade on Labour-Demand Elasticities: Intersectoral Matters," Working Papers 2000-07, CEPII research center. [Downloadable!]
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  4. Henk Kox & Arjan Lejour, 2005. "Regulatory heterogeneity as obstacle for international services trade," CPB Discussion Papers 49, CPB Netherlands Bureau for Economic Policy Analysis. [Downloadable!]
  5. M. Ayhan Kose & Kei-Mu Yi, 2002. "The trade comovement problem in international macroeconomics," Staff Reports 155, Federal Reserve Bank of New York. [Downloadable!]
  6. Rajesh Mehta & Ashok Parikh, 2005. "Impact of trade liberalization on import demands in India: a panel data analysis for commodity groups," Applied Economics, Taylor and Francis Journals, vol. 37(16), pages 1851-1863, September. [Downloadable!] (restricted)
  7. Juliette Milgram, 2003. "Quantitative Restrictions on Clothing Imports: Impact and Determinants of the Common Trade Policy Towards Developing Countries," Economic Working Papers at Centro de Estudios Andaluces E2003/04, Centro de Estudios Andaluces. [Downloadable!]
  8. Henk Kox & Arjan Lejour, 2005. "Liberalisation of the European services market and its impact on Switzerland," CPB Memoranda 130, CPB Netherlands Bureau for Economic Policy Analysis. [Downloadable!]
  9. Matthieu Crozet & Hélène Erkel-Rousse, 2004. "Trade performances, product quality perceptions and the estimation of trade price-elasticities," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00096826_v1, HAL. [Downloadable!]
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  10. Agama, Laurie-Ann & McDaniel, Christine A., 2002. "The NAFTA Preference and U.S.-Mexico Trade," Working Papers 15873, United States International Trade Commission, Office of Economics. [Downloadable!]
  11. Matthieu Crozet & Pamina Koenig, 2007. "Structural gravity equations with intensive and extensive margins," EconomiX Working Papers 2007-36, University of Paris West - Nanterre la Défense, EconomiX. [Downloadable!]
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  12. Head, Charles Keith & Mayer, Thierry, 2003. "The Empirics of Agglomeration and Trade," CEPR Discussion Papers 3985, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  13. Joseph P. Byrne & Julia Darby & Ronald MacDonald, 2006. "US Trade and Exchange Rate Volatility: A Real Sectoral Bilateral Analysis," Working Papers 2006_9, Department of Economics, University of Glasgow. [Downloadable!]
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  14. Edgar Cudmore & John Whalley, 2003. "Border Delays and Trade Liberalization," NBER Working Papers 9485, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  15. Benjamin Bridgman, 2008. "Energy Prices and the Expansion of World Trade," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(4), pages 904-916, October. [Downloadable!] (restricted)
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  16. Philippe Quirion & Damien Demailly, 2008. "Changing the Allocation Rules in the EU ETS: Impact on Competitiveness and Economic Efficiency," Working Papers 2008.89, Fondazione Eni Enrico Mattei. [Downloadable!]
  17. George Alessandria & Alain Delacroix, 2004. "Trade and the (dis)incentive to reform labor markets: the case of reform in the European Union," Working Papers 04-18, Federal Reserve Bank of Philadelphia. [Downloadable!]
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  18. Combes, Pierre-Philippe & Lafourcade, Miren & Mayer, Thierry, 2003. "Can Business and Social Networks Explain the Border Effect Puzzle?," CEPR Discussion Papers 3750, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  19. Alessandro Olper & Valentina Raimondi, 2007. "Patterns and Determinants of International Trade Costs in the Food Industry," LICOS Discussion Papers 18807, LICOS - Centre for Institutions and Economic Performance, K.U.Leuven. [Downloadable!]
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  20. Soo Jung Ha & Geoffrey Hewings & Karen Turner, 2008. "Econometric estimation of Armington import elasticities for regional CGE models of the Chicago and Illinois economies," Working Papers 08-10, University of Strathclyde Business School, Department of Economics. [Downloadable!]
  21. Henk Kox & Arjan Lejour & Raymond Montizaan, 2004. "The free movement of services within the EU," CPB Documents 69, CPB Netherlands Bureau for Economic Policy Analysis. [Downloadable!]
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