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Is the Armington Elasticity Really Constant across Importers?

  • Yilmazkuday, Hakan

This paper shows that the Armington elasticity, which refers to both the elasticity of substitution across goods and the price elasticity of demand under the assumption of a large number of varieties, systematically changes from one importer country to another in an international trade context. Then a natural question to ask is "What determines the Armington elasticity?" The answer comes from the distinction between the elasticity of demand with respect to the destination price (i.e., the Armington elasticity) and the elasticity of demand with respect to the source price. Under additive trade costs, it is shown that the elasticity of demand with respect to the destination price is equal to the sum of the elasticity of demand with respect to the source price and the elasticity of demand with respect to the trade costs. The empirical results using the United States export data at the state level support this relation; hence, it is more likely to have a constant elasticity of demand with respect to the source price rather than a constant Armington elasticity under additive trade costs. In terms of policy implications, the constant Armington elasticity undervalues the effects of a policy change around 3 or 4 times compared to the importer-specific Armington elasticities.

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File URL: https://mpra.ub.uni-muenchen.de/15954/1/MPRA_paper_15954.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 15954.

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Date of creation: Jun 2009
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Handle: RePEc:pra:mprapa:15954
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  1. McDaniel, Christine A. & Balistreri, Edward J., 2002. "A Discussion on Armington Trade Substitution Elasticities," Working Papers 15856, United States International Trade Commission, Office of Economics.
  2. Gordon, Robert J, 1990. "What Is New-Keynesian Economics?," Journal of Economic Literature, American Economic Association, vol. 28(3), pages 1115-71, September.
  3. Mario J. Crucini & Hakan Yilmazkuday, 2009. "A Model of International Cities: Implications for Real Exchange Rates," NBER Working Papers 14834, National Bureau of Economic Research, Inc.
  4. Kiminiori Matsuyama, 1994. "Complementaries and Cumulative Processes In Models of Monopolistic Competition," Discussion Papers 1106, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  5. Richardson, J. David, 1973. "Beyond (but back to?) the elasticity of substitution in international trade," European Economic Review, Elsevier, vol. 4(4), pages 381-392, December.
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  8. Robert Dekle & Jonathan Eaton & Samuel Kortum, 2008. "Global Rebalancing with Gravity: Measuring the Burden of Adjustment," IMF Staff Papers, Palgrave Macmillan, vol. 55(3), pages 511-540, July.
  9. Millimet, Daniel & Henderson, Daniel, 2006. "Is Gravity Linear?," Departmental Working Papers 0517, Southern Methodist University, Department of Economics.
  10. James Brander & Paul Krugman, 1980. "A "Reciprocal Dumping" Model of International Trade," Working Papers 405, Queen's University, Department of Economics.
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  12. Gallaway, Michael P. & McDaniel, Christine A. & Rivera, Sandra A., 2003. "Short-run and long-run industry-level estimates of U.S. Armington elasticities," The North American Journal of Economics and Finance, Elsevier, vol. 14(1), pages 49-68, March.
  13. David L. Hummels & Volodymyr Lugovskyy, 2008. "International pricing in a generalized model of ideal variety," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
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  15. repec:oup:restud:v:69:y:2002:i:3:p:707-27 is not listed on IDEAS
  16. Elhanan Helpman & Marc Melitz & Yona Rubinstein, 2008. "Estimating Trade Flows: Trading Partners and Trading Volumes," The Quarterly Journal of Economics, Oxford University Press, vol. 123(2), pages 441-487.
  17. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," NBER Working Papers 10480, National Bureau of Economic Research, Inc.
  18. Rubinstein, Yona & Helpman, Elhanan & Melitz, Marc, 2008. "Estimating Trade Flows: Trading Partners and Trading Volumes," Scholarly Articles 3228230, Harvard University Department of Economics.
  19. Santos Silva, J.M.C & Tenreyro, Silvana, 2005. "The Log of Gravity," CEPR Discussion Papers 5311, C.E.P.R. Discussion Papers.
  20. Hickman, Bert G. & Lau, Lawrence J., 1973. "Elasticities of substitution and export demands in a world trade model," European Economic Review, Elsevier, vol. 4(4), pages 347-380, December.
  21. Cassey, Andrew, 2006. "State export data: origin of movement vs. origin of production," MPRA Paper 3352, University Library of Munich, Germany.
  22. M. Dumont & G. Rayp & P. Willemé & O. Thas, 2003. "Correcting Standard Errors in Two-Stage Estimation Procedures with Generated Regressands," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 03/172, Ghent University, Faculty of Economics and Business Administration.
  23. Feenstra, Robert C., 1989. "Symmetric pass-through of tariffs and exchange rates under imperfect competition: An empirical test," Journal of International Economics, Elsevier, vol. 27(1-2), pages 25-45, August.
  24. Jonathan Eaton & Samuel Kortum, 2002. "Technology, Geography, and Trade," Econometrica, Econometric Society, vol. 70(5), pages 1741-1779, September.
  25. Christian Broda & David E. Weinstein, 2006. "Globalization and the Gains From Variety," The Quarterly Journal of Economics, Oxford University Press, vol. 121(2), pages 541-585.
  26. Harrigan, James, 1996. "Openness to trade in manufactures in the OECD," Journal of International Economics, Elsevier, vol. 40(1-2), pages 23-39, February.
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