Working Paper No. 1296

Import Demand Elasticities Based on Quantity Data: Theory, Evidence and Implications for the Gains from Trade

Published: August 5, 2019, revised November, 2019Pages: 36Keywords: Model selection; Partial identication; Trade elasticity; ArmingtonJEL-codes: C52; F10; F12; F14

Import Demand Elasticities Based on Quantity Data: Theory, Evidence and Implications for the Gains from Trade Shon Ferguson and Aaron Smith


Correct estimates of import demand elasticities are essential for measuring the gains from trade and predicting the impact of trade policies. We show that estimates of import demand elasticities hinge critically on whether they are derived  using trade quantities or trade values, and this difference is due to properties of the estimators. Using partial identification methods, we show theoretically that the upper bound on the set of plausible estimates is lower when using traded quantities, compared to the standard approach using trade values. Our theoretical predictions are confirmed using detailed product-level data on U.S. imports for the years 1993–2006. Our proposed method using traded quantities leads to smaller point estimates of the import demand elasticities for many goods and imply larger gains from trade compared to estimates based on trade values.

 

Shon Ferguson

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Interdisciplinary European Studies

The European Union in a Changing World Order

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This book explores how the European Union responds to the ongoing challenges to the liberal international order. These challenges arise both within the EU itself and beyond its borders, and put into question the values of free trade and liberal democracy. 

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