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The Elasticity of Trade: Estimates and Evidence

  • Ina Simonovska
  • Michael E. Waugh

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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16796.

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Date of creation: Feb 2011
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Publication status: published as Simonovska, Ina & Waugh, Michael E., 2014. "The elasticity of trade: Estimates and evidence," Journal of International Economics, Elsevier, vol. 92(1), pages 34-50.
Handle: RePEc:nbr:nberwo:16796
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