Trade Elasticities in Aggregate Models : Estimates for 191 Countries

Armington’s insight that imports and domestically produced goods were imperfect substitutes hasunleashed extensive estimates of the associated trade elasticity, primarily for developed countries. This notionof product differentiation, which extends symmetrically to exports and domestic goods, has underpinned trade-focused,computable general equilibrium models of developing countries, including the aggregate, compact version, the1–2–3 model. Noting that estimates of trade elasticities for developing countries are few, this paper remedies thesituation. Using the vector error correction model as the primary method and controlling for global trends and otherfactors, the analysis derives the long-run elasticity estimates for 191 countries, ranging from China (populationof 1.4 billion) to Tuvalu (11,200), including 45 of 48 Sub-Saharan African countries and understudied countriessuch as Benin, the Republic of Congo, Niger, Fiji, Haiti, Kiribati, and Tajikistan. Import and export elasticities ofhigh-income countries average about 1.4, reflecting the greater diversity of their economies; developing countries’elasticities average around 0.7 for imports and 0.6 for exports. Elasticities generally rise with per capita income.That the elasticity is greater than one for developed and less for developing countries implies asymmetric responsesto shocks, which conforms to intuition and corroborates the analytical results from the 1–2–3 model.