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The autonomy of trade elasticities: choice and consequences

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  • Jaime R. Marquez

Abstract

Fifty years of econometric work on trade assumes that trade elasticities are invariant to changes in spending patterns, that prices can be taken as given, and that expenditures on domestic and foreign goods can be studied independently of each other. To relax these assumptions, this paper assembles a simultaneous model explaining trade among Canada, Japan, and the United States. Spending behaves according to the Rotterdam model which, by design, embodies all of the properties of utility maximization and does not treat trade elasticities as autonomous parameters. Pricing behaves according to the pricing-to-market hypothesis which recognizes exporters' incentives to discriminate across export markets. Parameter estimation relies on the Full Information Maximum Likelihood approach and uses bilateral price data for 1965-1987. According to the evidence, treating trade elasticities as autonomous parameters and ignoring the statistical implications of simultaneity and optimization undermines our effectiveness in addressing questions relevant to economic interactions among nations. Specifically, the estimates from the Rotterdam model predict that asymmetries in income elasticities, which were important once, have vanished.

Suggested Citation

  • Jaime R. Marquez, 1992. "The autonomy of trade elasticities: choice and consequences," International Finance Discussion Papers 422, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:422
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    References listed on IDEAS

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    1. Gopal Yadav, 1977. "Variable Elasticities and Non-Price Rationing in the Import Demand Function of Canada, 1956:1-1973:4," Canadian Journal of Economics, Canadian Economics Association, vol. 10(4), pages 702-712, November.
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    Cited by:

    1. Andrew M. Warner, 1992. "Import demand and supply with relatively few theoretical or empirical puzzles," International Finance Discussion Papers 433, Board of Governors of the Federal Reserve System (U.S.).
    2. Jaime R. Marquez, 1992. "Real exchange rates: measurement and implications for predicting U.S. external imbalances," International Finance Discussion Papers 427, Board of Governors of the Federal Reserve System (U.S.).
    3. Jaime R. Marquez, 1995. "A century of trade elasticities for Canada, Japan, and the United States," International Finance Discussion Papers 531, Board of Governors of the Federal Reserve System (U.S.).
    4. Warner, Andrew M, 1994. "Does World Investment Demand Determine U.S. Exports?," American Economic Review, American Economic Association, vol. 84(5), pages 1409-1422, December.
    5. Rafael Reuveny & John Maxwell, 1998. "Free Trade and Arms Races," Journal of Conflict Resolution, Peace Science Society (International), vol. 42(6), pages 771-803, December.
    6. Jaime R. Marquez, 1994. "The constancy of illusions or the illusion of constancies: income and price elasticities for U.S. imports, 1890-1992," International Finance Discussion Papers 475, Board of Governors of the Federal Reserve System (U.S.).

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