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Foreign-Domestic Substitution, Import Penetration And Cge Modelling

Author

Listed:
  • Kenneth W. Clements

    (Economics Discipline, Business School, University of Western Australia)

  • Marc Jim Mariano

    (KPMG Economics)

  • George Verikios

    (KPMG Economics and Griffith University)

Abstract

Foreign-domestic substitution elasticities (the so-called “Armington elasticities”) determine the degree of competitiveness in demand between similar products produced in different countries and are key parameters in a variety of numerical models of international trade. Armington elasticities are part of the explanation of the large increases in market shares of foreign products relative to locally produced ones in Australia, for example. The existing literature provides only limited evidence on these elasticities for Australia with the most disaggregated produced some time ago by Alaouze et al. (1977). This paper provides up-to-date parametric estimates of Armington elasticities for Australia with a reasonable degree of sectoral disaggregation. We use 22-years of data for 20 types of merchandise commodities, using OLS, panel and restricted-panel approaches. Our estimates range from 0.30 to 2.26, with higher elasticities for Transport and Equipment products and lower ones for Energy and. We illustrate the use of our elasticities with a trade-policy simulation using a computable generable equilibrium model of the Australian economy. We analyse the sensitivity of the results to the Armington elasticities by also using those estimated by Alaouze et al. (1977). We find an overestimation of economic effects when using the old Armington values.

Suggested Citation

  • Kenneth W. Clements & Marc Jim Mariano & George Verikios, 2020. "Foreign-Domestic Substitution, Import Penetration And Cge Modelling," Economics Discussion / Working Papers 20-13, The University of Western Australia, Department of Economics.
    • Handle: RePEc:uwa:wpaper:20-13
    Note: MD5 = d163165977623287eb09d144ebb6ad43
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    References listed on IDEAS

    as
    1. Peter Dixon & Michael Jerie & Maureen Rimmer, 2016. "Modern Trade Theory for CGE Modelling: The Armington, Krugman and Melitz Models," Journal of Global Economic Analysis, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University, vol. 1(1), pages 1-110, June.
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    Cited by:

    1. Marc Jim M. Mariano & George Verikios & Kenneth W. Clements, 2023. "Are Input-Output Coefficients Really Fixed?," Economics Discussion / Working Papers 23-06, The University of Western Australia, Department of Economics.
    2. Marc Jim Mariano & George Verikios, 2022. "Understanding the Effects of Coronavirus on Australian Households: A Macro–Micro Analysis," Economic Papers, The Economic Society of Australia, vol. 41(3), pages 215-231, September.
    3. Clements, Kenneth W. & Mariano, Marc Jim M. & Verikios, George & Wong, Berwyn, 2022. "How elastic is alcohol consumption?," Economic Analysis and Policy, Elsevier, vol. 76(C), pages 568-581.
    4. Clements, Kenneth & Mariano, Marc Jim & Verikios, George, 2022. "Expenditure patterns, heterogeneity, and long-term structural change," Economic Modelling, Elsevier, vol. 113(C).

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    More about this item

    Keywords

    Foreign-domestic substitution; Armington elasticities; CGE analysis; International trade; Tariff policy;
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