Estimating Trade Elasticities

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Mann and Plueck [pdf] investigate disaggregate China-U. Using an error correction model specification applied to disaggregate bilateral data over the period, they find extremely high income elasticities for US imports from China: for capital and consumer goods the estimated long run income elasticities are 10 and 4, respectively.

The consumer good price elasticity is not statistically significant, while the capital good elasticity is implausibly high, around On the other hand, US exports to China have a relatively low income elasticity of 0. The price elasticity estimates are not statistically significant.

Estimating Trade Elasticities

In general, they have difficulty obtaining sensible coefficient estimates. Willem Thorbecke [ version here as pdf ] examines aggregate bilateral US-China data over the period. Using both the Johansen maximum likelihood method, as well as the Stock-Watson dynamic OLS methodology, he finds statistically significant evidence of cointegration between incomes, real exchange rates and trade flows. US imports from China have a real exchange rate elasticity ranging from 0.

How to Solve Elasticity Problems in Economics

The income elasticity ranges between 0. Interestingly, the income elasticities are not statistically significant, even when quantitatively large. For US exports to China, he obtains exchange rate elasticities ranging from 0.

One issue encountered by Thorbecke is the issue of appropriate deflators. He deflated the trade flows by the U. This imposes the condition that the bundle of goods and services imported from China is the same as the bundle exported from the U.

Estimating U.S.-China Trade Elasticities: Some Very Preliminary Results

In order to investigate the issue further, I, along with my coauthors Yin-Wong Cheung and Eiji Fujii , pick up where I left off in my post on measuring U. The resulting series in log terms are shown in the figure below.

Figure 1: U. Deflated using non-industrial country manufacturing import price index, and Chinese-sourced imports price index for imports, and capital goods export price index for exports. I rely upon the standard imperfect substitutes model discussed here [pdf] as starting point. In this approach, exports are an excess over goods devoted to domestic consumption.

Estimating Trade Elasticities | Walmart Canada

To allow for the substitution between goods sourced from other markets, I add in an exchange rate against other currencies. Finally, in the standard approach, the supply curve of exports is assumed to be perfectly elastic, and fixed. Where ex is bilateral exports from China to the U.

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Back Matter Pages About this book Introduction One cannot exaggerate the importance of estimating how international trade responds to changes in income and prices. But there is a tension between whether one should use models that fit the data but that contradict certain aspects of the underlying theory or models that fit the theory but contradict certain aspects of the data. The essays in Estimating Trade Elasticities book offer one practical approach to deal with this tension.


The analysis starts with the practical implications of optimising behaviour for estimation and it follows with a re-examination of the puzzling income elasticity for US imports that three decades of studies have not resolved. The results indicate a powerful long-run effect from supply on exports. Also, the real exchange rate elasticity depends upon the behavior of third country exchange rates. There is evidence of pricing to market and of a J-curve.

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