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Trade elasticity: Estimates from product-level data

Author

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  • Juyoung Cheong
  • Do Won Kwak
  • Kam Ki Tang

Abstract

In a seminal paper, Helpman et al. (2008) demonstrate that accounting for self-selection and firm heterogeneity is crucial for obtaining unbiased estimates in the gravity equation. In this paper, we show how this insight helps solve the trade elasticity puzzle that, hitherto, trade elasticity estimates in the gravity equations have implied very small welfare gains from trade. To apply their approach to product-level data, we propose new exclusion restrictions based on the export learning literature. Our new estimates imply much larger welfare gains from trade than the previous literature suggested.

Suggested Citation

  • Juyoung Cheong & Do Won Kwak & Kam Ki Tang, 2020. "Trade elasticity: Estimates from product-level data," CAMA Working Papers 2020-29, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2020-29
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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2020-04/29_2020_cheong_kwak_tang.pdf
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    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • F10 - International Economics - - Trade - - - General
    • F15 - International Economics - - Trade - - - Economic Integration

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