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The transmission of import prices to domestic prices: an application to Indonesia

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  • Peter Warr

Abstract

The manner in which the landed price of imports affects domestic prices is central to trade policy analysis. This study clarifies the relationship between two methods of modelling this relationship. These are the pass-through elasticity and the 'Armington' elasticity of substitution in demand between imported and domestically produced goods. The latter treatment is commonly used within applied general equilibrium models. The properties of the models are sensitive to the assumed values of these elasticities, but empirical estimates of Armington elasticities are rare. The theoretical relationship between the pass-through elasticity and the Armington elasticity is derived from a simple supply and demand model which incorporates Armingtion assumptions. The relationship is then illustrated empirically in the context of rice imports into Indonesia. Even though imported and domestically produced rice are considered relatively close substitutes in demand within Indonesia, time series econometric estimates of the pass-through elasticity imply Armington elasticities no greater than about 5. The Armington elasticities implied by the estimates of the pass-through elasticity presented here are well within the range of parameter estimates normally assumed within applied general equilibrium models.

Suggested Citation

  • Peter Warr, 2008. "The transmission of import prices to domestic prices: an application to Indonesia," Applied Economics Letters, Taylor & Francis Journals, vol. 15(7), pages 499-503.
    • Handle: RePEc:taf:apeclt:v:15:y:2008:i:7:p:499-503
    DOI: 10.1080/13504850500425410
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    References listed on IDEAS

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    1. Kapuscinski, Cezary A. & Warr, Peter G., 1999. "Estimation of Armington elasticities: an application to the Philippines," Economic Modelling, Elsevier, vol. 16(2), pages 257-278, April.
    2. L. ALAN WINTERS & NEIL McCULLOCH & ANDREW McKAY, 2015. "Trade Liberalization and Poverty: The Evidence So Far," World Scientific Book Chapters, in: Non-Tariff Barriers, Regionalism and Poverty Essays in Applied International Trade Analysis, chapter 14, pages 271-314, World Scientific Publishing Co. Pte. Ltd..
    3. Paul S. Armington, 1969. "A Theory of Demand for Products Distinguished by Place of Production (Une théorie de la demande de produits différenciés d'après leur origine) (Una teoría de la demanda de productos distinguiénd," IMF Staff Papers, Palgrave Macmillan, vol. 16(1), pages 159-178, March.
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    Cited by:

    1. Warr, Peter G., 2005. "Food policy and poverty in Indonesia: a general equilibrium analysis," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 49(4), pages 1-23.
    2. Zhang, Dengjun & Asche, Frank & Oglend, Atle, 2014. "Ethanol and trade: An analysis of price transmission in the US market," Energy Economics, Elsevier, vol. 42(C), pages 1-8.
    3. Cassoni, Adriana & Flores, Manuel, 2008. "Methodological shortcomings in estimating Armington elasticities," Conference papers 331813, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    4. Zeraatkish, Yaghoub & Moteghaed, Haniyeh Yousefi, 2016. "Transmission of International Prices of Corn to Iranian Domestic Market," International Journal of Agricultural Management and Development (IJAMAD), Iranian Association of Agricultural Economics, vol. 6(3), September.
    5. Zhao, Xin & Calvin, Katherine V. & Wise, Marshall A. & Iyer, Gokul, 2021. "The role of global agricultural market integration in multiregional economic modeling: Using hindcast experiments to validate an Armington model," Economic Analysis and Policy, Elsevier, vol. 72(C), pages 1-17.
    6. Ejaz Qureshi, M. & Hanjra, Munir A. & Ward, John, 2013. "Impact of water scarcity in Australia on global food security in an era of climate change," Food Policy, Elsevier, vol. 38(C), pages 136-145.
    7. Parjiono & A.B.M. Rabiul Alam Beg & Richard Monypenny, 2013. "The driving forces of the level and the growth rate of real per capita income in Indonesia," Applied Economics, Taylor & Francis Journals, vol. 45(17), pages 2389-2400, June.
    8. Petr Procházka & Vladimír Hönig, 2018. "Economic Analysis of Diesel-Fuel Replacement by Crude Palm Oil in Indonesian Power Plants," Energies, MDPI, vol. 11(3), pages 1-12, February.
    9. Varela, Gonzalo J., 2012. "Incomplete, slow, and asymmetric price transmission in ten product markets of Bolivia," Policy Research Working Paper Series 6291, The World Bank.

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