Demand elasticities in international trade: are they really low?
The authors analyze the U.S. demandfor Bangladeshi imports for products restricted under the Multifiber Arrangement. Because Bangladesh is only a small supplier of these products and Latin American and Asian countries can supply close substitutes, the authors expected a high elasticity of demand for Bangladeshi imports, and they found consistently high estimates based on statistically significant coefficients. Their finding accords with trade theorists'prejudice that small countries can essentially behave as price takers, but conflicts with the empirical literature view that demand elasticities are low, rarely exceeding 3 and generally between 1 and 2. The authors'analysis differs from the existing literature in three ways: they derive a set of estimation equations from an explicit, utility-maximization model and use the estimated parameters of the utility function to obtain the Marshallian own-price and cross-price elasticities as well as the income elasticity of demand; they take explicit account of U.S. imports from competitors of Bangladesh, relying directly on competitors'prices; and they use highly disaggregated data that make the unit value of exports a better proxy for price than using aggregated export data commonly used in this literature. The authors outline their theoretical model for deriving their estimated equations in Section 1; preliminarily determine who Bangladesh's competitors are in Section 2; and estimate the demand equation derived in Section 1, and derive the price and income elasticities facing Bangladesh in Section 3.
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