The autonomy of elasticities for trade among Canada, Japan, and the United States

Abstract

This paper assembles a simultaneous model explaining trade among Canada, Japan, and the United States. Spending behaves according to the Rotterdam model which, by design, embodies all of the properties of utility maximization and does not treat trade elasticities as autonomous parameters. Pricing behaves according to the pricing-to-market hypothesis which recognizes exporters' incentives to discriminate across export markets. Parameter estimation relies on the Full Information Maximum Likelihood approach and uses bilateral price data for 1965–1987. Specifically, the estimates from the Rotterdam model predict that asymmetries in income elasticities, which were important once, have vanished.