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Import Price-Elastcities: Reconsidering the Evidence

Author

Listed:
  • Helene Erkel-Rousse

    (TEAM-CNRS University of Paris 1)

  • Daniel Mirza

    (TEAM-CNRS University of Paris 1)

Abstract

Recent geography and trade empirical studies based on monopolistic competition [Hummels, 1998; Hanson, 1999; Head and Ries, 1999] suggest high levels of trade price-elasticities (between 3 and 11). However, direct estimations of price-elasticities in trade equations, using price indexes at the aggregate or industry levels, lead to much lower values than those predicted by the prior studies and the theory (usually around unity). In this article, we show that these inconclusive results may be due to an econometric misspecification of the trade equations, to measurement errors in import price indexes as well as endogeneity problems. We re-estimate import price-elasticities from gravity-like equations using methods of transformed least squares and instrumental variables. Our study is based on compatible bilateral trade and activity data from the OECD and INSEE1 for 14 import countries, 16 trading partners, 27 industries and 23 years. When suitable instrumental variables are used, we find relatively high price-elasticities, usually ranging from 1 to 7, the highest estimates corresponding to industries producing homogeneous goods. Our results constitute a first step towards a reconciliation of the theory and the evidence.

Suggested Citation

  • Helene Erkel-Rousse & Daniel Mirza, 2000. "Import Price-Elastcities: Reconsidering the Evidence," Econometric Society World Congress 2000 Contributed Papers 0909, Econometric Society.
  • Handle: RePEc:ecm:wc2000:0909
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    References listed on IDEAS

    as
    1. Keith Head & Thierry Mayer, 2000. "Non-Europe: The magnitude and causes of market fragmentation in the EU," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 136(2), pages 284-314, June.
    2. H. Hanson, Gordon, 2005. "Market potential, increasing returns and geographic concentration," Journal of International Economics, Elsevier, vol. 67(1), pages 1-24, September.
    3. Rauch, James E., 1999. "Networks versus markets in international trade," Journal of International Economics, Elsevier, vol. 48(1), pages 7-35, June.
    4. Morris Goldstein & Mohsin S. Khan, 2017. "Income and Price Effects in Foreign Trade," World Scientific Book Chapters,in: TRADE CURRENCIES AND FINANCE, chapter 1, pages 3-81 World Scientific Publishing Co. Pte. Ltd..
    5. Grossman, Gene M, 1982. "Import Competition from Developed and Developing Countries," The Review of Economics and Statistics, MIT Press, vol. 64(2), pages 271-281, May.
    6. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-959, December.
    7. Greenhalgh, Christine & Taylor, Paul & Wilson, Rob, 1994. "Innovation and Export Volumes and Prices--A Disaggregated Study," Oxford Economic Papers, Oxford University Press, vol. 46(1), pages 102-135, January.
    8. Jonathan Eaton & Samuel Kortum, 1997. "Technology and Bilateral Trade," NBER Working Papers 6253, National Bureau of Economic Research, Inc.
    9. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
    10. Antoine Magnier & Joël Toujas-Bernate, 1994. "Technology and trade: Empirical evidences for the major five industrialized countries," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 130(3), pages 494-520, September.
    11. Harrigan, James, 1996. "Openness to trade in manufactures in the OECD," Journal of International Economics, Elsevier, vol. 40(1-2), pages 23-39, February.
    12. Crozet, M. & Erkel-Rousse, H., 2000. "Trade Performances and the Estimation of Price-Elasticities : Quality Matters," Papiers d'Economie Mathématique et Applications 2000.61, Université Panthéon-Sorbonne (Paris 1).
    13. Marquez, Jaime & McNeilly, Caryl, 1988. "Income and Price Elasticities for Exports of Developing Countries," The Review of Economics and Statistics, MIT Press, vol. 70(2), pages 306-314, May.
    14. Bergstrand, Jeffrey H, 1989. "The Generalized Gravity Equation, Monopolistic Competition, and the Factor-Proportions Theory in International Trade," The Review of Economics and Statistics, MIT Press, vol. 71(1), pages 143-153, February.
    15. Hall, Robert E, 1988. "The Relation between Price and Marginal Cost in U.S. Industry," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 921-947, October.
    16. Bresnahan, Timothy F., 1989. "Empirical studies of industries with market power," Handbook of Industrial Organization,in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 17, pages 1011-1057 Elsevier.
    17. Hélène Erkel-Rousse, 1997. "Endogenous Differentiation Strategies, Comparative Advantage and the Volume of Trade," Annals of Economics and Statistics, GENES, issue 47, pages 121-149.
    18. Paul Krugman, 1992. "A Dynamic Spatial Model," NBER Working Papers 4219, National Bureau of Economic Research, Inc.
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    More about this item

    JEL classification:

    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • F1 - International Economics - - Trade

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