Trade Elasticities

Conventional aggregate trade elasticity estimates hardly vary across countries. We introduce an aggregate elasticity that is implied by theory: It is the value that equates the welfare gains from trade as implied by one‐ and multi‐sector versions of the model in Arkolakis et al. (American Economic Review, 102 (2012):94–130). These estimates are predicated on sector‐level values for trade elasticites, which we provide at three‐digit levels for 28 developed and developing countries. The values for this aggregate elasticity vary greatly across countries, and they do so because of countries' patterns of production and because a given sector‐level elasticity displays considerable cross‐country heterogeneity.     

Income Elasticities at different price vectors

Cross-country data are used to evaluate the income elasticities of the demand for ten broad groups of goods at two different price vectors: the observed prices of separate countries and the geometric means of these prices across all countries. The major effect is on the income elasticity of the demand for food; using observed rather than geometric mean prices results in lower elasticity values for the more affluent countries.     

Estimation of Price Elasticities for International Telecommunications Demand

This paper examines the effect of price per call minute on international telecommunications demand for calls made from Greece to five destination countries: Australia, the USA, Canada, the UK, and Germany. For this purpose the authors consider two different models, one with constant price elasticity, the log-linear demand function, and another one with time varying price elasticity, log-linear demand where all variables except price are in logarithms. These models were estimated for calls made during peak and off-peak periods, using quarterly data from 1997:I to 2003:IV. The outgoing traffic includes volume of calls in minutes made by the incumbent only and by the incumbent and the mobile providers.     

Elasticities of substitution for a regulated cost function

This paper proposes a modification to the Uzawa (1962) characterization of the Allen partial elasticity of substitution under cost minimization to take account of the behavioral properties of the cost function for a firm subject to rate-of-return regulation.     

Using Empirical Point Elasticities to Teach Tax Incidence

Using point elasticities rather than using either arc elasticities or slopes of demand and supply curves provides the best method for teaching students about the economic impacts of excise taxes. Not only does a point-elasticity approach simplify theoretical analysis of tax impacts, but it also allows instructors to take advantage of publicly available empirical estimates of demand and supply elasticities to show students how theoretical results can be applied to real-world tax policy issues. To illustrate these advantages, the authors use several available estimates of point elasticities of demand and supply of raw sugar to calculate the economic impacts of a recently proposed penny-per-pound tax on raw cane sugar grown in the Florida Everglades.     

Using Elasticities to Derive Optimal Income Tax Rates

This paper derives optimal income tax formulas using compensated and uncompensated elasticities of earnings with respect to tax rates. A simple formula for the high income optimal tax rate is obtained as a function of these elasticities and the thickness of the top tail of the income distribution. In the general non-linear income tax problem, this method using elasticities shows precisely how the different economic effects come into play and which are the key relevant parameters in the optimal income tax formulas of Mirrlees. The optimal non-linear tax rate formulas are expressed in terms of elasticities and the shape of the income distribution. These formulas are implemented numerically using empirical earning distributions and a range of realistic elasticity parameters.     

Patterns of technical change: a geometrical analysis using the wage–profit rate schedule

In this paper we examine some basic stylized facts of economic growth according to the modern restatement of the classical theory of income distribution. In particular, we make use of a wage–profit frontier in order to explore the patterns of technical change experienced by a set of 18 industrialized economies, during the last 40 years. Our main purpose is to document the evolution of technical change. Using empirical evidence from the Italian industry, we also make an attempt to provide an explanation to data from a classical perspective, alternative to the standard approach founded on the aggregate production function.     

Elasticities of import demand and economic development: The Irish Experience

In their paper on Venezuela, Melo and Vogt suggested two hypotheses concerning the relationship between the elasticities of import demand and economic development. In this paper these hypotheses are tested in relation to the experience of the Republic of Ireland, which it is argued closely approximated the conditions described by the Melo-Vogt hypotheses. Both hypotheses are rejected in the case of the Republic of Ireland, where it is argued special factors, such as the nature of the development strategy pursued and proximity to a large dominant trading partner, undetermined the conditions underlying the Melo-Vogt hypotheses.     

The Effect of International Trade on Labor-Demand Elasticities: Intersectoral Matters

This paper studies the impact of trade on the price-elasticity of aggregate labor demand, based on the idea that a variation in the cost of (a given type of) labor has an effect on the sectoral trade specialization of an economy, at the expense of the domestic productions using this factor intensively, even when the trade balance is kept unchanged. As this effect is more important the more open the economy, trade openness induces an increase in the associated labor-demand elasticity, at least if the country has a comparative disadvantage in the industries using intensively the type of labor considered. This argument is illustrated by a simple model, based on an Armington hypothesis, with an empirical assessment for France.     

Estimating Income and Price Elasticities of Trade in a Cointegration Framework

This paper presents further evidence on the empirical regularity known as the "45-degree rule." Income and price elasticities of trade are estimated for 21 countries in a cointegration framework. More specifically, the autoregressive distributed lag (ARDL) modeling approach and the DOLS procedure are adopted to estimate the long-run structure. The empirical results confirm the existence of a systematic relationship between growth rates and income elasticity estimates: faster growing economies have high income elasticities of demand for their exports but lower import elasticities, which implies that faster growth can be observed without any marked secular trend in real exchange rates.     

Aggregation Bias in Elasticities of Substitution and the Minimum Wage Paradox

While the employment effects of minimum wages are usually reported to be small (suggesting low substitutability between skill types), direct estimates suggest a much larger degree of substitutability. This article argues that this paradox is largely due to a bias induced by the aggregation of skill types into broad categories. An assignment model is applied where skilled workers have a comparative advantage in complex jobs. The implied pattern of substitutability reveals the sources of the bias. Estimation results for the United States show elasticities of complementarity to be underestimated by up to a factor 2.5. The methods laid out likewise can be applied to other markets where different quality types are close substitutes, such as the housing market.     

Elasticities of Demand and Willingness to Pay for Environmental Services in Sweden

Are environmental services luxuriesor necessities? Are low-income groupsrelatively more willing to pay forenvironmental improvements than high-incomegroups? The discussion on the shape of theenvironmental Kuznets curve and environmentaljustice call for analyses that approach thesequestions. Following a survey-based approachfor modelling the demand for public goods, thispaper provides estimates of income and priceelasticities of demand for reduced marineeutrophication effects in the case of theBaltic Sea, using data from five Swedishcontingent valuation studies. Point estimatesindicate that reduced marine eutrophicationeffects can be classified as a necessity and anordinary and price elastic service. Confidenceintervals show however that the classificationas a necessity is not statisticallysignificant. Income elasticities of willingnessto pay, not to be confused with incomeelasticities of demand, are estimated for abroad range of environmental services inSweden. A basic finding is that income tends toinfluence willingness to pay positively andsignificantly. The elasticity estimates are inmost cases greater than zero, but less thanunity, indicating that the benefits ofenvironmental improvements tend to beregressively distributed. In a cost-benefitanalysis of a project suggesting environmentalimprovements, distributional concerns thereforecall for an introduction of weights or at leasta sensitivity analysis of how weighting wouldchange decisions about the project's socialprofitability.     

Elasticities of substitution and export demands in a world trade model

Alternative complete models of world trade, based on the trade shares matrix approach, are specified and estimated for twenty-seven countries and regions. This model attempts to explain the composition of imports on the bases of relative prices and time trend, given the total quantity of imports of each country. Elasticities of substitution amongst imports of different countries of origin in each import market are obtained and used in the derivation of aggregate export demand functions for the individual countries. There is also a comparison of the predictive performance of the alternative models.     

Growth, Expansion of Markets, and Income Elasticities in World Trade

The Houthakker–Magee effect implies that a country facing unfavorable income elasticities in trade must either grow at a slower rate than its trading partners or experience a trend worsening of the current account and/or depreciation of the real exchange rate. Krugman (1989 ) first documented the existence of a "45-degree rule" under which income elasticities are systematically related to growth rates. I develop a model which is a generalization of Krugman (1989 ) in several dimensions (including intertemporal). The intertemporal assumption of equal consumption growth for individuals across countries and the assumption of no intertemporal trade can be viewed as two extreme benchmarks. Empirical tests of the various 45-degree rules suggest that it is misleading to treat income elasticities as structural, as is commonly done in forecasts of current account movements. The data also seem to be more consistent with the benchmark of no intertemporal trade than that of complete intertemporal trade.     

Thirlwall’s Law and the Stability of Export and Import Income Elasticities

The aim of this paper is to examine the stability of income elasticities used in Thirlwall's law to approximate a country's long-term growth and to see empirically how non-constancy will affect these predictions. For this purpose, three countries - Canada, New Zealand and the UK - are analysed, using annual time series data from 1973 to 1995. These three countries were chosen on the basis of their contrasting trade patterns. The results obtained are different for each country but they still suggest the predictive power of one of the two specifications of Thirlwall's law is good.     

Elasticities of substitution between energy and non-energy inputs in China power sector

Energy substitution is considered as a key process to determine the economic outcome of decisions related to energy and environment policies. The sign and magnitude of energy substitution have been widely debated, and the results are divergent. This paper applies the translog cost function specification to estimate factor share equations based on the energy and non-energy inputs, whose coefficients are used to observe the energy degree of substitutability with the other traditional inputs for power industry in China. The results suggest that energy is the least price sensitive among three production factors. The four types of input elasticities (cross-price, Morishima's, Allen and McFadden's shadow elasticity of substitution) show that there are substantial substitution possibilities between energy and capital, while energy and labor have weak substitution. The findings imply that for power industry in China, to reduce energy consumption, more capital should be invested. With respect to labor, though, it appears less energy-saving potential.     

Trade Performances, Product Quality Perceptions, and the Estimation of Trade Price Elasticities

Traditional trade models ignoring the dimension of product quality generally lead to excessively low trade price elasticities. This paper estimates import market share equations including a quality image proxy derived from survey data. The estimation results, based on panel data for the four main EU member states, confirm the part played by product quality perceptions in the estimation of trade price elasticities, at least for highly differentiated products. Introducing the quality image proxy into the models leads to a significant increase in the price elasticities, which thus become superior to unity, in conformity with theoretical elasticities of substitution.     

Long-Period Trade Elasticities for Canada, Japan, and the United States

Most analyses of imports use brief, postwar samples and offer a large range of elasticity estimates suggesting that the role of income and prices in determining imports is not known with any precision. This paper offers an analysis of that role using data since 1890 for Canada, Japan, and the United States. The elasticities of the log–linear model are estimated and found to be inconsistent with the view that income and prices affect imports. Optimization models are considered and found to predict secular changes in income and price elasticities and explain the dispersion of estimates of the literature.