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Demand elasticities in international trade : are they really low?

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  • Shah, Shekhar
  • Mishra, Deepak
  • Panagariya, Arvind

Abstract

The authors analyze the U.S. demandfor Bangladeshi imports for products restricted under the Multifiber Arrangement. Because Bangladesh is only a small supplier of these products and Latin American and Asian countries can supply close substitutes, the authors expected a high elasticity of demand for Bangladeshi imports, and they found consistently high estimates based on statistically significant coefficients. Their finding accords with trade theorists'prejudice that small countries can essentially behave as price takers, but conflicts with the empirical literature view that demand elasticities are low, rarely exceeding 3 and generally between 1 and 2. The authors'analysis differs from the existing literature in three ways: they derive a set of estimation equations from an explicit, utility-maximization model and use the estimated parameters of the utility function to obtain the Marshallian own-price and cross-price elasticities as well as the income elasticity of demand; they take explicit account of U.S. imports from competitors of Bangladesh, relying directly on competitors'prices; and they use highly disaggregated data that make the unit value of exports a better proxy for price than using aggregated export data commonly used in this literature. The authors outline their theoretical model for deriving their estimated equations in Section 1; preliminarily determine who Bangladesh's competitors are in Section 2; and estimate the demand equation derived in Section 1, and derive the price and income elasticities facing Bangladesh in Section 3.

Suggested Citation

  • Shah, Shekhar & Mishra, Deepak & Panagariya, Arvind, 1996. "Demand elasticities in international trade : are they really low?," Policy Research Working Paper Series 1712, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1712
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    References listed on IDEAS

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    Cited by:

    1. Irwin, Douglas A., 2003. "The optimal tax on antebellum US cotton exports," Journal of International Economics, Elsevier, vol. 60(2), pages 275-291, August.
    2. Nuno Limão & Marcelo Olarreaga, 2006. "Trade Preferences to Small Developing Countries and the Welfare Costs of Lost Multilateral Liberalization," World Bank Economic Review, World Bank Group, vol. 20(2), pages 217-240.
    3. Silvia Laens & María Inés Terra, 2005. "MERCOSUR: Asymmetries and Strengthening of the Customs Union: Options for the Common External Tariff," IDB Publications (Working Papers) 2923, Inter-American Development Bank.
    4. Welsch, Heinz, 2008. "Armington elasticities for energy policy modeling: Evidence from four European countries," Energy Economics, Elsevier, vol. 30(5), pages 2252-2264, September.
    5. Marcelo Olarreaga & Hiau Looi Kee & Alessandro Nicita, 2004. "Estimating Import Demand and Export Supply Elasticities," Econometric Society 2004 North American Summer Meetings 368, Econometric Society.
    6. Hiau Looi Kee & Alessandro Nicita & Marcelo Olarreaga, 2008. "Import Demand Elasticities and Trade Distortions," The Review of Economics and Statistics, MIT Press, vol. 90(4), pages 666-682, November.
    7. Raihan, Selim & Razzaque, Mohammad A, 2007. "WTO and regional trade negotiation outcomes: quantitative assessments of potential implications on Bangladesh," MPRA Paper 38475, University Library of Munich, Germany.
    8. Alessandro Antimiani & Valeria Costantini & Chiara Martini & Luca Salvatici, 2011. "Cooperative and non-cooperative solutions to carbon leakage," Departmental Working Papers of Economics - University 'Roma Tre' 0136, Department of Economics - University Roma Tre.
    9. Athukorala, Premachandra & Riedel, James, 1994. "Demand and Supply Factors in the Determination of NIE Exports: A Simultaneous Error-Correction Model for Hong Kong: A Comment," Economic Journal, Royal Economic Society, vol. 104(427), pages 1411-1414, November.
    10. Costantini, Valeria & D'Amato, Alessio & Martini, Chiara & Tommasino, Maria Cristina & Valentini, Edilio & Zoli, Mariangela, 2013. "Taxing international emissions trading," Energy Economics, Elsevier, vol. 40(C), pages 609-621.
    11. S Shahnawaz, 2004. "Market Power and Unites States Sectoral Textile Imports," Economic Issues Journal Articles, Economic Issues, vol. 9(2), pages 69-84, September.
    12. Mahdi Ghodsi & Julia Grübler & Robert Stehrer, 2016. "Import Demand Elasticities Revisited," wiiw Working Papers 132, The Vienna Institute for International Economic Studies, wiiw.
    13. Antimiani, Alessandro & Costantini, Valeria & Martini, Chiara & Salvatici, Luca & Tommasino, Maria Cristina, 2013. "Assessing alternative solutions to carbon leakage," Energy Economics, Elsevier, vol. 36(C), pages 299-311.
    14. Welsch, Heinz, 2006. "Armington elasticities and induced intra-industry specialization: The case of France, 1970-1997," Economic Modelling, Elsevier, vol. 23(3), pages 556-567, May.
    15. Chin Yang & Anthony Loviscek & Hui Cheng & Ken Hung, 2012. "A Note on Allen’s Arc Elasticity with Arithmetic, Geometric and Harmonic Means," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 40(2), pages 161-171, June.
    16. Daniel Lederman & William F. Maloney, 2012. "Does What You Export Matter? In Search of Empirical Guidance for Industrial Policies," World Bank Publications, The World Bank, number 9371, April.
    17. Rajesh Mehta & Ashok Parikh, 2005. "Impact of trade liberalization on import demands in India: a panel data analysis for commodity groups," Applied Economics, Taylor & Francis Journals, vol. 37(16), pages 1851-1863.
    18. Sajal Lahiri & Anjum Nasim, 2005. "Commercial Policy Reform in Pakistan: Opening up the Economy under Revenue Constraints," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 12(6), pages 723-739, November.
    19. Lahiri, Sajal & Nasim, Anjum & Ghani, Jawaid, 2000. "Optimal second-best tariffs on an intermediate input with particular reference to Pakistan," Journal of Development Economics, Elsevier, vol. 61(2), pages 393-416, April.

    More about this item

    Keywords

    Environmental Economics&Policies; Economic Theory&Research; Markets and Market Access; Payment Systems&Infrastructure; Consumption; Economic Theory&Research; Environmental Economics&Policies; Access to Markets; Markets and Market Access; Consumption;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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