Asymmetric Armington Model: Method and Application

To model two-way trade, most CGE models use the Armington assumption on the import side. In this paper, we extend the Armington assumption by introducing a distinction between responses to increases and decreases in the price of imports relative to domestic products; i.e., we assume that demand substitution possibilities are asymmetric. Specifically, for demanders, it is easier to substitute imports for domestic products than it is to substitute domestic products for imports. The paper presents the mathematical structure of the asymmetric Armington assumption and embeds it in a simple CGE model that is applied to a Mongolian dataset. A set of comparative-static simulations of terms of trade shocks with alternative assumptions for the elasticity of substitution between imports and domestic products are considered.