Armington Elasticities Research Articles

The Armington Model

A Productivity Commission Staff Working Paper, The Armington Model, by Peter Lloyd and Xiao-guang Zhang was released on 8 February 2006, in conjunction with an additional staff working paper, Armington Elasticities and Terms of Trade Effects in Global CGE Models. The paper explores how models adopting the Armington formulation differ from traditional models, in their quantitative properties and underlying theory of trade. In publishing its research in this area, the Commission hopes to clarify issues that arise as single-country and global trade models are increasingly used to assess the potential impacts of various types of trade liberalisation. The views expressed in this paper are those of the staff involved and do not necessarily reflect those of the Productivity Commission.

Armington elasticities in intermediate inputs trade: a problem in using multilateral trade data

Abstract. In this paper we find that the estimates of Armington elasticities (the elasticity of substitution between groups of products identified by country of origin) obtained from multilateral trade data can differ from those obtained from bilateral trade data. In particular, the former tends to be higher than the latter when trade consists largely of intermediate inputs. Given that the variety of intermediate inputs traded across borders is increasing rapidly and that the effect of this increase is not adequately captured in multilateral trade data, the evidence shows that the employment of multilateral trade data to estimate Armington elasticities needs caution. JEL classification: F14, C51

Armington Elasticities in Intermediate Inputs Trade: A Problem in Using Multilateral Trade Data

This paper finds that the estimates of Armington elasticities (the elasticity of substitution between groups of products identified by country of origin) obtained from multilateral trade data can differ from those obtained from bilateral trade data. In particular, the former tends to be higher than the latter when trade consists largely of intermediate inputs. Given that the variety of intermediate inputs traded across borders is increasing rapidly, and that the effect of this increase is not adequately captured in multilateral trade data, the evidence shows that the use of multilateral trade data to estimate Armington elasticities needs caution.

Armington Elasticities in Intermediate Inputs Trade: A Problem in Using Multilateral Trade Data

This paper finds that the estimates of Armington elasticities (the elasticity of substitution between groups of products identified by country of origin) obtained from multilateral trade data can differ from those obtained from bilateral trade data. In particular, the former tends to be higher than the latter when trade consists largely of intermediate inputs. Given that the variety of intermediate inputs traded across borders is increasing rapidly, and that the effect of this increase is not adequately captured in multilateral trade data, the evidence shows that the use of multilateral trade data to estimate Armington elasticities needs caution.

Information, International Substitutability, and Globalization

Improved information allows home firms to rule out more potential foreign trade partners in advance of attempting to form a match. The increased responsiveness to country wage or goods price differentials resulting from this better first cut causes the general-equilibrium elasticity of substitution between national labor forces or the Armington elasticity of substitution between domestic and imported output to increase. Further results include an increase in the elasticity of domestic labor demand, an increase in the extent to which reductions in conventional trade barriers equalize national wages, and reduced “natural protection” for domestic producers.

Armington Elasticities for Brazil - 1986-2002: New Estimates

The structure introduced by Armington (1969) has been used to analyze trade policy in partial and general equilibrium models. The Armington elasticities, the degree of substitution between domestic and import goods are known to be important, but are seldom estimated empirically. Therefore, we estimate them for 28 industrial sectors, based on the Brazilian Input-Output table over the period 1986-2000. Initially we discuss the construction of the data set and the treatment that was given to the relative prices, for taking into account the trade liberalization initiated in 1990. According to the dynamic properties of the data we estimate four different econometric models. 25 out of the 28 sectors had positive and significant Armington estimates that were significant at the ten-percent level. They range between 0,16 e 4,95, which reflects the different degree of substitutability between domestic and import goods in the Brazilian industry.

Short-run and long-run industry-level estimates of U.S. Armington elasticities

The Armington substitution elasticity is a key parameter for trade-policy analysis. We estimate short- and long-run Armington elasticities for 309 manufacturing industries at the four-digit Standard Industrial Classification (SIC) level over the period 1989–1995. Our estimation results offer a comprehensive, disaggregated, and up-to-date set of Armington elasticities. On average, long-run estimates are approximately two times larger than the short-run estimates, which is important since long-run estimates are more appropriate for most trade-policy analysis. Also, statistically significant differences exist within most three-digit SIC categories, which highlights the importance of estimation at a disaggregated level.

A Discussion on Armington Trade Substitution Elasticities

Applied partial and general equilibrium models used to examine trade policy are almost universally sensitive to trade elasticities. Indeed, the Armington elasticity, the degree of substitution between domestic and imported goods, is a key behavioral parameter that drives the quantitative, and sometimes the qualitative, results that policymakers use. While standard transparent approaches to econometric estimation of these elasticities have been offered for the last 30 years, the estimates are viewed as too small by many trade economists. A few robust findings emerge from the econometric literature: (1) more disaggregate analyses find higher elasticities, (2) long-run estimates are higher than short-run estimates, and (3) time series analyses generally find lower elasticities relative to cross-sectional studies. We offer simulation results to illustrate the sensitivity of general equilibrium models to Armington elasticites. We conclude with remarks on the current challenges that remain in determining these important parameters.

A Discussion on Armington Trade Substitution Elasticities

Applied partial and general equilibrium models used to examine trade policy are almost universally sensitive to trade elasticities. Indeed, the Armington elasticity, the degree of substitution between domestic and imported goods, is a key behavioral parameter that drives the quantitative, and sometimes the qualitative, results that policymakers use. While standard transparent approaches to econometric estimation of these elasticities have been offered for the last 30 years, the estimates are viewed as too small by many trade economists. A few robust findings emerge from the econometric literature: (1) more disaggregate analyses find higher elasticities, (2) long-run estimates are higher than short-run estimates, and (3) time series analyses generally find lower elasticities relative to cross-sectional studies. We offer simulation results to illustrate the sensitivity of general equilibrium models to Armington elasticites. We conclude with remarks on the current challenges that remain in determining these important parameters.

Estimates and Determinants of Armington Elasticities for the U.S. Food Industry

This paper provides estimates of elasticities of substitution between domestic and imported goods for 40 4-digit S.I.C. food manufacturing industries and explains the inter-industry differences among these coefficients in terms of industry sectoral characteristics. The results show that there is a wide range of variation among such elasticities and that the intensity of each industry’s percentage of output sold to final consumers, foreign direct investment, expenditures on advertising and the existence of import quotas affect the degree of substitutability between domestic and foreign goods in the face of a relative price change.

Long-Run Industry-Level Estimates of U.S. Armington Elasticities

A key relationship for trade policy analysis is the degree of substitution between imported and domestic goods due to changes in the relative price of those two goods, commonly known as the Armington elasticity. We estimate Armington elasticities for 312 industries at the 4-digit SIC level over the period 1989 to 1995. Our estimation results offer the most comprehensive, disaggregated, and up-to-date set of Armington elasticities. We report long-run estimates when possible, and find that long-run estimates are on average twice as large as the short-run estimates. This is important since the long-run estimates are more appropriate for most trade policy analysis than the short-run estimates. Further, it is shown that statistically significant differences exist within most 3-digit SIC industries, which highlights the importance of estimation at a disaggregated level since policy changes are typically focused on narrow product definitions.

Estimation of Armington elasticities: an application to the Philippines

The elasticities of substitution between imported and domestically produced goods — Armington elasticities — are estimated in this paper for the Philippines. The estimated elasticities are intended for use in a large, empirically based computable general equilibrium model of the Philippine economy. Armington elasticities are known to be important for the properties of these models but are seldom estimated empirically. The results of this paper suggest that estimation is possible for developing countries, like the Philippines, for which economic data are generally considered poor, provided appropriate account is taken of the dynamic properties of the data.

Estimates of Armington Elasticities for the South African Manufacturing Sector

This paper presents estimates of the elasticity of substitution between imported and domestic intermediate goods in South African manufacturing. These elasticities are known as “Armington” elasticities after the Armington assumption that imported and domestic goods in any sector are imperfect substitutes. Numerical estimates of these elasticities are important in order to model the effects of tariff reform in South Africa. The estimates obtained are contrasted with current assumptions about the magnitudes of the elasticities in modelling, and the shortcomings of the data and methodology used in estimating these elasticities are also identified.

Explaining Armington: What Determines Substitutability between Home and Foreign Goods?

For decades trade economists have modeled imperfect substitution between home and foreign goods in consumption (often called the Armington assumption) with little analysis of what explains the wide variation in these substitution elasticities across sectors. Using a varying coefficients model, the authors estimate Armington elasticities between U.S. domestic and foreign goods across over one hundred industrial sectors from 1980 to 1988 and examine the role of product, industry, political, and 'home bias' factors as determinants. They find strong support that the presence of foreign-owned affiliates affects Armington elasticities in important ways, and some support that entry barriers and union presence have an effect.

Armington Models and Terms-of-Trade Effects: Some Econometric Evidence for North America

Elasticities of substitution among U.S. imports from Mexico, Canada, the rest of the world, and competing domestic production are estimated for twenty-two mining and manufacturing sectors, based on quarterly data for 1980-88. These elasticities will provide a benchmark for computable general equilibrium models of North American trade liberalization. The authors also find that estimated Armington elasticities are low and, therefore, researchers may want to reconsider the device of using high values of Armington elasticities in multicountry computable general equilibrium models to avoid large terms-of-trade losses associated with preferential trade liberalization.

Armington elasticities for United States manufacturing sectors

Armington elasticities for United States manufacturing sectors