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Trade Coefficients and the Role of Elasticity in a Spatial CGE Model Based on the Armington Assumption

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  • Ando, Asao
  • Meng, Bo
  • Chao, Qu
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Abstract

The Armington Assumption in the context of multi-regional CGE models is commonly interpreted as follows: Same commodities with different origins are imperfect substitutes for each other. In this paper, a static spatial CGE model that is compatible with this assumption and explicitly considers the transport sector and regional price differentials is formulated. Trade coefficients, which are derived endogenously from the optimization behaviors of firms and households, are shown to take the form of a potential function. To investigate how the elasticity of substitutions affects equilibrium solutions, a simpler version of the model that incorporates three regions and two sectors (besides the transport sector) is introduced. Results indicate: (1) if commodities produced in different regions are perfect substitutes, regional economies will be either autarkic or completely symmetric and (2) if they are imperfect substitutes, the impact of elasticity on the price equilibrium system as well as trade coefficients will be nonlinear and sometimes very sensitive.

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Paper provided by Institute of Developing Economies, Japan External Trade Organization(JETRO) in its series IDE Discussion Papers with number 204.

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Date of creation: 2009
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Publication status: Published in IDE Discussion Paper. No. 204. 2009
Handle: RePEc:jet:dpaper:dpaper204

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Keywords: Armington Assumption; Spatial CGE; Elasticity of substitution; Trade coefficient; Econometric model;

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  1. James Brander, 1980. "Intra-Industry Trade in Identical Commodities," Working Papers 380, Queen's University, Department of Economics.
  2. Meng, Bo & Ando, Asao, 2005. "An Economic Derivation on Trade Coefficients under the Framework of Multi-regional I-O Analysis," IDE Discussion Papers 29, Institute of Developing Economies, Japan External Trade Organization(JETRO).
  3. Asao Ando & Bo Meng, 2009. "The Transport Sector And Regional Price Differentials: A Spatial Cge Model For Chinese Provinces," Economic Systems Research, Taylor & Francis Journals, vol. 21(2), pages 89-113.
  4. Lofgren, Hans & Robinson, Sheman, 2002. "Spatial-network, general-equilibrium model with a stylized application," Regional Science and Urban Economics, Elsevier, vol. 32(5), pages 651-671, September.
  5. Philip McCann, 2005. "Transport costs and new economic geography," Journal of Economic Geography, Oxford University Press, vol. 5(3), pages 305-318, June.
  6. Plassmann, Florenz, 2005. "The advantage of avoiding the Armington assumption in multi-region models," Regional Science and Urban Economics, Elsevier, vol. 35(6), pages 777-794, November.
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