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The Elasticity of Trade: Estimates and Evidence

  • Ina Simonovska
  • Michael Waugh

    (Department of Economics, University of California Davis)

Quantitative results from a large class of structural gravity models of international trade depend critically on the elasticity of trade with respect to trade frictions. We develop a new simulated method of moments estimator to estimate this elasticity from disaggregate price and trade-flow data and we use it within Eaton and Kortum's (2002) Ricardian model. We apply our estimator to disaggregate price and trade-flow data for 123 countries in the year 2004. Our method yields a trade elasticity of roughly four, nearly fifty percent lower than Eaton and Kortum's (2002) approach. This difference doubles the welfare gains from international trade.

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File URL: http://wp.econ.ucdavis.edu/11-2.pdf
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Paper provided by University of California, Davis, Department of Economics in its series Working Papers with number 112.

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Length: 51
Date of creation: 01 Nov 2011
Handle: RePEc:cda:wpaper:11-2
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