Estimation of Armington elasticities for trade-policy analysis

Publication Date08 May 2020
AuthorKai Liu,Masato Yamazaki,Atsushi Koike
SubjectEconomics,International economics
Estimation of Armington
elasticities for trade-policy analysis
Kai Liu
Department of Engineering, Kobe University, Kobe, Japan
Masato Yamazaki
Disaster Mitigation Research Center, Nagoya University, Nagoya, Japan, and
Atsushi Koike
Department of Engineering, Kobe University, Kobe, Japan
Purpose The purpose of this paper is to compare the Armington elasticities for world average values and
country-specic values and obtain evidence for whether the world average elasticities and the rule of two,which
have been applied in many papers, are accurate for cereals in trade policy studies related to an individual country.
Design/methodology/approach The authors use panel data with a nested model to estimate and compare
Armington elasticities based on world average values and country-specic values from 10 countries and regions.
Findings The results suggest that cerealselasticities vary between world average values and country-specic
values, and the rule of twois not strictly applicable. In fact, the less than twoconcept ts well in many cases.
Originality/value This study sheds light on theeffects of country heterogeneity on the elasticitiesand
the accuracy of usingworld average elasticities in a trade policy studyfor an individual country. In addition,
this paper offersestimated values of country-specic elasticitiesfor 10 countries and regions.
Keywords Cereals, Armington elasticity, International trade, Trade-policy model
Paper type Research paper
1. Introduction
The elasticity of substitution between goods produced in different countries, Armington
elasticity, implies that goods traded internationally, differentiated by country of origin, are
substitutablefor each other (Armington,1969). This study concerns fourkinds of Armington
elasticity.These include the elasticityindicating the response strengthof the relative demand
between domestically produced and importedgoods to their relative pricesand the elasticity
describingthe response strength of the relative demand of goods from foreignsources of one
countrys imports to their relative prices. In addition, both of them will be estimated at the
aggregate global level and at the country or regional level. They are estimated as price
elasticities,where higher values representa greater degree of substitutability.
It is no exaggeration to treat Armington elasticity as one of the most important
parameters in international trade economics. It determines the behavior of trade ows and
international prices, captures both the own-price elasticity of demand and the cross-price
elasticity of demand, and measures how closethe two goods are at the product level.
Elasticity is critical for evaluating welfare changes in international trade, and in recent
This work is nancially supported in part by the scholarship from China Scholarship Council (CSC)
under the Grant code CSC201806350228. Our deepest gratitude goes rst and foremost to Professor
Yueying Mu from China agricultural university for her constant writing assistance.
Journalof Chinese Economic and
ForeignTrade Studies
Vol.13 No. 1, 2020
pp. 21-35
© Emerald Publishing Limited
DOI 10.1108/JCEFTS-12-2019-0066
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