Estimating import price elasticity while controlling for quality
AbstractImport price elasticity tends to be under-estimated due to the omission of quality effects. This dissertation aims to fill this gap by analyzing 1) how quality effects affect the estimation of import price elasticity, 2) the impact of quality innovation in the various goods sectors of an economy and 3) the limitations pertaining to the estimation of the true import price elasticity as well as the policy implications of quality innovation on trade. In order to adjust for quality effects, a quality proxy is constructed. This proxy considers the role of product innovation in the form of Research and Development (R&D) expenditure as well as externalities arising from the knowledge acquired in other sectors and countries. A gravity model is formulated to isolate the price effect from the quality effect in estimating the import price elasticity. A panel analysis is used, covering 9 European countries (Germany, Denmark, Spain, Finland, France, Ireland, Italy, Netherlands and United Kingdom) over the period of 1996 to 2003. The empirical results indicate that the import price elasticities are higher with adjustments for quality, although they do not reach unity as predicted by the theoretical elasticity of substitution. The high values of price elasticity show that quality innovation not only encourages trade but also encourages domestic consumption of local and better quality products. In particular, the sectors which recorded an import price elasticity superior to 1 are those which produce homogeneous and non-industrialized products like metal products, non-metallic mineral products, textiles, rubber and plastics. Exporting countries that gain the most through quality innovation are Spain, Finland and the UK. The role of quality innovation has a significant effect of increasing overall trade for the region. Quality innovation of 1% on the part of the exporters increases their exports by a range of 0.2 to 1.2 percentage points. As such, quality innovation should be strongly encouraged to increase trade flows of the countries so as to increase the economy‟s overall growth.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by HAL in its series Post-Print with number dumas-00643757.
Date of creation: 30 Jun 2011
Date of revision:
Note: View the original document on HAL open archive server: http://dumas.ccsd.cnrs.fr/dumas-00643757
Contact details of provider:
Web page: http://hal.archives-ouvertes.fr/
import price elasticity; quality; innovation; elasticity of substitution; international trade; product differentiation;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-12-13 (All new papers)
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.:
- Antoine Berthou & Charlotte Emlinger, 2010. "Crises and the Collapse of World Trade: the Shift to Lower Quality," Working Papers 2010-07, CEPII research center.
- Brecard, Dorothee & Fougeyrollas, Arnaud & Le Mouel, Pierre & Lemiale, Lionel & Zagame, Paul, 2006. "Macro-economic consequences of European research policy: Prospects of the Nemesis model in the year 2030," Research Policy, Elsevier, vol. 35(7), pages 910-924, September.
- Keith Head & Thierry Mayer, 2000.
"Non-Europe: The magnitude and causes of market fragmentation in the EU,"
Review of World Economics (Weltwirtschaftliches Archiv),
Springer, vol. 136(2), pages 284-314, June.
- Keith Head & Thierry Mayer, 2004. "Non-Europe : the magnitude and causes of market fragmentation in the EU," Cahiers de la Maison des Sciences Economiques bla99004a, Université Panthéon-Sorbonne (Paris 1).
- Hélène Erkel-Rousse & Daniel Mirza, 2002.
"Import price elasticities: reconsidering the evidence,"
Canadian Journal of Economics,
Canadian Economics Association, vol. 35(2), pages 282-306, May.
- Erkel-Rousse, H. & Mirza, D., 2000. "Import Price-Elasticities : Reconsidering the Evidence," Papiers d'Economie MathÃÂ©matique et Applications 2000.52, UniversitÃ© PanthÃ©on-Sorbonne (Paris 1).
- Helene Erkel-Rousse & Daniel Mirza, 2000. "Import Price-Elastcities: Reconsidering the Evidence," Econometric Society World Congress 2000 Contributed Papers 0909, Econometric Society.
- Lionel Fontagné & Michaël Freudenberg, 1997. "Intra-Industry Trade: Methodological Issues Reconsidered," Working Papers 1997-01, CEPII research center.
- Aiginger, K., 1998. "A framework for evaluating the dynamic competitiveness of countries," Structural Change and Economic Dynamics, Elsevier, vol. 9(2), pages 159-188, June.
- Crozet, M. & Erkel-Rousse, H., 2000. "Trade Performances and the Estimation of Price-Elasticities : Quality Matters," Papiers d'Economie MathÃÂ©matique et Applications 2000.61, UniversitÃ© PanthÃ©on-Sorbonne (Paris 1).
- Rauch, James E., 1999.
"Networks versus markets in international trade,"
Journal of International Economics,
Elsevier, vol. 48(1), pages 7-35, June.
- Greenhalgh, Christine Anne & Taylor, Paul, 1990.
"Innovation and Export Volumes and Prices: A Disaggregated Study,"
CEPR Discussion Papers
487, C.E.P.R. Discussion Papers.
- Greenhalgh, Christine & Taylor, Paul & Wilson, Rob, 1994. "Innovation and Export Volumes and Prices--A Disaggregated Study," Oxford Economic Papers, Oxford University Press, vol. 46(1), pages 102-35, January.
- Greenhalgh, C. & Taylor, P. & Wilson, R., 1991. "Innovation and Export Volumes and Prices- A Disaggregated Study," Economics Series Working Papers 99107, University of Oxford, Department of Economics.
- Krugman, Paul & Venables, Anthony J., 1994.
"Globalization and the Inequality of Nations,"
CEPR Discussion Papers
1015, C.E.P.R. Discussion Papers.
- Krugman, Paul & Venables, Anthony J., 1995. "Globalization and the Inequality of Nations," Working Paper Series 430, Research Institute of Industrial Economics.
- Paul Krugman & Anthony J. Venables, 1995. "Globalization and the Inequality of Nations," NBER Working Papers 5098, National Bureau of Economic Research, Inc.
- Carole Chevallier & Arnaud Fougeyrollas & Pierre Le Mouël & Paul Zagamé, 2006. "A Time to Sow, A Time to Reap for the European countries: A Macro-Econometric Glance at the RTD National Action Plans," Revue de l'OFCE, Presses de Sciences-Po, vol. 97(5), pages 235-257.
- Aiginger, Karl, 1997. "The Use of Unit Values to Discriminate between Price and Quality Competition," Cambridge Journal of Economics, Oxford University Press, vol. 21(5), pages 571-92, September.
- Lionel Fontagné & Michaël Freudenberg & Nicolas Peridy, 1997. "Trade Patterns Inside the Single Market," Working Papers 1997-07, CEPII research center.
- Daniel K.N. Johnson, 2002. "The OECD Technology Concordance (OTC): Patents by Industry of Manufacture and Sector of Use," OECD Science, Technology and Industry Working Papers 2002/5, OECD Publishing.
- Fontagné, Lionel & Freudenberg, Michael & Péridy, Nicolas, 1998. "Intra-Industry Trade and the Single Market: Quality Matters," CEPR Discussion Papers 1959, C.E.P.R. Discussion Papers.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (CCSD).
If references are entirely missing, you can add them using this form.