Trade Elasticities Research Articles

Trade Elasticities

AbstractConventional 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.

Value-Added Trade, Exchange Rate Pass-Through and Trade Elasticity: Revisiting the Trade Competitiveness

How is exchange rate pass-through (ERPT) measures affected by increasing participation in global value chains? This paper measures ERPT for value-added trade, where intermediate inputs are shared among countries in a back-and-forth manner for producing a single final product. Estimation of pass-through was done using World Input-Output Database (WIOD), World Economic Outlook (WEO), and OECD statistics. Empirically estimated findings suggest that ignoring the value-added trade will cause a systematic upward bias in the estimation of ERPT. From empirical investigation, it is also evident that there exists substantial heterogeneity in pass-through rates across sectors: sectors with high-integration into global market functions with a lower rate of exchange in comparison to sectors with less integration.

Corruption, Trade Costs, and Gains from Tariff Liberalization: Evidence from Southern Africa

This paper exploits quasi-experimental variation in tariffs in southern Africa to estimate trade elasticities. Traded quantities respond only weakly to a 30 percent reduction in the average nominal tariff rate. Trade flow data combined with primary data on firm behavior and bribe payments suggest that corruption is a potential explanation for the observed low elasticities. In contexts of pervasive corruption, even small bribes can significantly reduce tariffs, making tariff liberalization schemes less likely to affect the extensive and the intensive margins of firms' import behavior. The tariff liberalization scheme is, however, still associated with improved incentives to accurately report quantities of imported goods, and with a significant reduction in bribe transfers from importers to public officials. (JEL D22, D73, F13, H83, O17, O19, O24)

Goodwin cycles and the BoPC growth paradigm: A macrodynamic model of growth and fluctuations

The paper builds a non-linear macrodynamic model to study the relation between the functional distribution of income, technological progress and economic growth. In the short-term, the interaction between the productivity regime, the demand regime and the distributive conflict generates cyclical paths a la Goodwin. In the long-term, output growth rate is constrained by the balance of payments a la Thirlwall, in which the elasticities of foreign trade are modeled as a function of the complex relation between the wage-share and the innovation capabilities of theeconomy. O artigo constrói um modelo dinâmico não-linear para estudar a relação entre a distribuição funcional da renda, o progresso técnico e o crescimento econômico. No curto prazo, a interação entre o regime de produtividade, o regime de demanda e o conflito distributivo gera trajetórias cíclicas a la Goodwin. No longo prazo, o crescimento do produto é restrito pelo balanço de pagamentos a la Thirlwall, em que as elasticidades de comércio exterior são modeladas pela complexa relação entre o wage-share e a capacidade inovativa da economia.

A Study on the Relationship Among Exports, Exchange Rate, and Economic Growth

This paper aims to analyze the recent relationship among exports, exchange rate, and economic growth in Korea, Japan, and the US for the period from 2000 to 2013. It makes use of econometric procedures and empirical estimates for major currency-owned large economies and non-major currency-owned countries. One task for which the elasticities of international trade and real GDP are needed is in developing exchange rate assessments. This study found that there is a significant relationship going from exports and exchange rate to the real GDP. Based on the recent outcome of empirical tests, the increase in the exports helps explain economic growth, suggesting that the effect of the exports-led growth has been decreasing. We may guess that the US and Japan and their respective major currencies could have different value-and-volume-effects with Korea.

Transfers in the Gravity Equation: The Case of Foreign Aid

This paper presents a theoretical gravity model of trade in which foreign aid is considered as a transfer instead of being part of the trade cost, as it has been previously done in the related literature. We argue that the usual specification leads to invalid out-of-sample predictions, biased coefficients and moreover it ignores heterogeneity. The proposed model is estimated for a sample of 188 countries over the period 1988-2013 using panel fixed effects and PPML techniques and the resulting trade elasticities with respect to aid are compared with those obtained from the traditional specification. The main results show that average effect of one additional US $ of aid is around 0.56$ of total imports according to our model, whereas with the alternative model an average effect of an implausible amount of 11$ of imports is obtained. In addition, a decomposed version of the model provides a new framework to disentangle the political effects of aid from the budget effects. While we consider the case of foreign aid, the modeling framework also applies to the study of other transfer, as for example remittances.

Breaking Down World Trade Elasticities: A Panel ECM Approach

This paper exhaustively analyses the recent decline of international trade elasticities to output growth. We extend an empirical model of import demand functions to account not only for transitory factors, such as relative prices and import intensity-adjusted measures of demand (I-O Tables), but also for habitually neglected permanent factors such as protectionism, vertical integration (i.e. Global Value Chains) and foreign direct investment (FDI). Dealing with a non-stationary heteregenous panel of 27 countries, we estimate a panel Error Correction Model from 1960 to 2015 in order to break down world trade elasticities. Our main findings evidence: i) the presence of panel (cointegrating) structural changes in the trade-to-GDP relationship in 2000 and 2009, private consumption being a source of disruption; ii) although investment and exports are the most sensitive, import-intensive components of demand, this is far from being transitory, which is clearly weighing on the current slowdown; iii) the relevant contribution of GVCs shows a procyclical pattern, questioning the permanent nature of the current levelling-off of vertical integration processes. The lack of progress in reducing import tariffs and the usual discarded, complementary relationship between FDI and imports have a residual role. All in all, our results have substantial policy implications, as they reinforce the idea of a historical break towards a new ‘normal’ trading phase.

An Exploration of New Internet Measurement on International Trade: Does Population Also Matter?

This study explores new Internet measurements to examine the impact of the Internet diffusion on international trade across ten different countries. We find the strong evidence that the Internet stimulates international trade for all countries. Growth of trade volumes changes over time with heteroscedastic responses. Global population or human resources affect international trade insignificantly as well as the geographic distance. Furthermore, the results of trade elasticities show the Internet moves ahead of those from international trade. The positive influences of the growth of GDP are diluted by greater effects from population, and the dilution is much greater than the positive effect from GDP, which gives investors tracking routes for exchange rate strategies.

Estimating Price and Income Elasticities of Trade in Services in Nigeria

The study estimated the elasticity of trade in services to real exchange rates and income in Nigeria. Adopting the imperfect substitutes model, the empirical findings revealed an inelastic real exchange rate and income elasticities in export and import of services functions in the long and short run. However, the value of income elasticity significantly exceeds the value of real exchange rate elasticity. The results for the long and short run coefficient estimates are broadly consistent across alternative estimators with some exceptions. While the real exchange rate have a significant future impact on export of services, domestic income was found to be the major driver of future import of services in Nigeria. There is a need to formulate and implement government policies that can enhance the tradability of services in Nigeria and abroad.

An Analysis of Korea-ASEAN Trade and its Implications for the Shipping Industry in Korea

ABSTRACT The shipping industry is an import economic player in Korea, and demand for shipping closely intertwines with the global trade climate. Understanding how movements of income and price influence freight volume measured in TEU is critical for improving shipping companies’ fleet deployment and scheduling. This paper estimated within the framework of a vector error correction model in a time series analysis for the period of 2000Q1 to 2015Q2 trade elasticities of income and real exchange rate of Korea's exports to and imports from ASEAN-5 (Indonesia, Malaysia, the Philippines, Singapore and Thailand). We found that trade elasticity of income exerts a significant, positive influence on the volume of Korea's exports to and imports from ASEAN-5 and that during the same period the real exchange rate exerts asymmetric influence over Korea's trade with them. Surprisingly, we failed to find the Korea-ASEAN FTA to further facilitate trade volume between Korea and ASEAN-5, when measured in TEU.

Monetary policy and noise traders: A welfare analysis

This paper studies the choice of monetary policy regime in a small open economy with noise traders in forex markets. We focus on two simple rules: fixed exchange rates and inflation targeting. We contrast the above two rules against optimal policy with commitment under productivity shocks. In general, the presence of noise traders increases the desirability of a fixed exchange rate regime. We also evaluate the welfare impact of Tobin taxes in this milieu. These taxes help unambiguously in the absence of productivity shocks; their welfare impact under productivity shocks depends on the monetary regime in place and trade elasticity between domestic and foreign goods.

Monetary Policy and Tobin Taxes: A Welfare Analysis

This paper studies the choice of monetary policy regime in a small open economy with noise traders in forex markets. We focus on two simple rules: fixed exchange rates and inflation targeting. We contrast the above two rules against optimal policy with commitment under productivity shocks. In general, the presence of noise traders increases the desirability of a fixed exchange rate regime. We also evaluate the welfare impact of Tobin taxes on capital flows. These taxes help unambiguously in the absence of productivity shocks; their welfare impact under productivity shocks depends on the monetary regime in place and trade elasticity between domestic and foreign goods.

Measuring openness to trade

In this paper we derive a new measure of openness—trade potential index—that quantifies the potential gains from trade as a simple function of data. Using a standard multicountry trade model, we measure openness by a country׳s potential welfare gain from moving to a world with frictionless trade. In this model, a country׳s trade potential depends on only the trade elasticity and two observable statistics: the country׳s home trade share and its income level. Quantitatively, poor countries have greater potential gains from trade relative to rich countries, while their welfare costs of autarky are similar. This leads us to infer that rich countries are more open to trade. Our trade potential index correlates strongly with estimates of trade costs, while both the welfare cost of autarky and the volume of trade correlate weakly with trade costs. Thus, our measure of openness is informative about the underlying trade frictions.

Are Armington elasticities different across countries and sectors? A European study

CGE models are widely used for policy evaluation and impact analysis especially with respect to trade reforms, tax reforms, energy sector reform and development policy analysis. However, the results of such models are often argued to be sensitive to the choice of exogenous parameters such as trade elasticities. Several authors show that the choice of the so-called Armington elasticities in the demand function has a strong influence on the simulation results. Most existing estimates of Armington elasticities are only for the US. The few studies for other countries find substantially differing results. Nevertheless, many CGE modelers simply adopt the elasticities from other studies disregarding specific country and model characteristics. This paper aims at providing estimated elasticities based on recent data for a larger group of European countries. Using cointegration and panel fixed effects analyses we estimate the first order condition resulting from cost minimization or utility maximization subject to the CES utility or cost function in imports and domestic goods. The results show a rather large variation across sectors and countries and the magnitude is only partly comparable to the US elasticities. Moreover, in a small CGE application we are able to show that changing the elasticity set has a quantitative and even qualitative impact on CGE model results, which confirms the concern that one might end up with biased results due to a misspecification of the elasticities.

The Trade Consequences of Pricey Oil

This paper examines the trade and trade-induced welfare effects of oil prices. Using a gravity model of trade, the paper finds that the distance elasticity of trade significantly increases with the oil price. This suggests that high oil prices make trade less global, as they affect longer shipping routes more. The paper estimates that an increase in the oil price from $100 to $200 (in 2014 US$) would have similar trade effects as an import tariff around 17 percent for two countries 10,000 km away. This is akin to a 55 percent increase in shipping distance. This trade reduction would lower welfare by 0.03 percent in the average non-oil-exporting country.

Human Capital in Economic Development: From Labour Productivity to Macroeconomic Impact

Micro-econometric evidence reveals high private returns to education, most prominently in low-income countries. However, it is disputed to what extent this translates into a macro-economic impact. This paper projects the increase in human capital from higher education in Malawi and uses a dynamic applied general equilibrium model to estimate the resulting macroeconomics impact. This is contingent upon endogenous adjustments, in particular how labour productivity affects competitiveness and if this in turn stimulates exports. Choice among commonly applied labour market assumptions and trade elasticities results in widely different outcomes. Appraisal of such policies should consider not only the impact on human capital stocks, but also adjustments outside the labour market.

Optimal Monetary and Fiscal Policy at the Zero Lower Bound in a Small Open Economy

We investigate open economy dimensions of optimal monetary and fiscal policy at the zero lower bound (ZLB) in a small open economy model. At positive interest rates, the trade elasticity has negligible effects on optimal policy. In contrast, at the ZLB, the trade elasticity plays a key role in optimal policy prescriptions. The way in which the trade elasticity shapes policy depends on the government's ability to commit. Under discretion, the increase in government spending at the ZLB depends critically on the trade elasticity. Under commitment, the difference between future and current policies, both for domestic inflation and government spending, is smaller when the trade elasticity is higher.

Let's Try Next Door: Technical Barriers to Trade and Multi-Destination Firms

Highlights Stringent TBTs drive the average firm out of the market with a magnified effect for multi-destination players, who are encouraged to redirect their exports to other destinations (free of TBT concerns). Multi-destination firms are more likely to exit as a response to a stringent TBT. Thus, the imposition of a stringent TBT, by pushing multi-destination (high-productive) firms out of the market, reduces the average productivity of incumbent firms (i.e. the welfare of the imposing country). We combine aggregate estimations at sector-destination level with firm-level estimations and find that stringent TBTs represent mainly increases in fixed (more than variable) trade costs, with trade elasticity magnified for more homogeneous sectors.

A Spatial Perspective on European Integration: Heterogeneous Welfare and Migration Effects from the Single Market and the Brexit

We use a quantitative model to study the implications of European integration for welfare and migration flows across 1,318 regions. The model suggests that an increase of trade barriers to the level of 1957 reduces welfare by about 1-2 percent on average, depending on the presumed trade elasticity. However, remote regions may face initial welfare losses of up to 4 percent causing an estimated migration of about 8 million individuals to the European core. This implies that the dismantling of trade barriers in Europe has led to a more homogeneous spatial distribution of economic activity. With regard to the Brexit, we find moderate welfare losses for the UK of -0.44 percent in the most pessimistic scenario while continental Europe’s welfare declines by 0.18 percent. In the most unfavorable scenario, about 500,000 people would leave the UK in the long run.

Breaking Down World Trade Elasticities: a Panel ECM Approach

Este trabajo analiza exhaustivamente la reciente disminucion de las elasticidades del comercio internacional al crecimiento de la produccion. Extendemos un modelo empirico de funciones de demanda de importaciones para tener en cuenta no solo factores transitorios, tales como los precios relativos y medidas de demanda ajustadas por intensidad en las importaciones (tablas Input-Output), sino tambien por factores permanentes normalmente omitidos, tales como proteccionismo, integracion vertical [p. ej., cadenas globales de valor (CGV)] e inversion extranjera directa (IED). Mediante un panel heterogeneo y no estacionario de 27 paises, estimamos un modelo de panel de correccion de errores (MCE), desde 1960 a 2015, para descomponer las elasticidades del comercio mundiales. Nuestros resultados evidencian: i) la presencia de cambios estructurales (cointegrados) de panel en la relacion entre comercio y PIB en 2000 y 2009, siendo el consumo privado una fuente de perturbacion; ii) si bien la inversion y las exportaciones son los componentes de demanda mas sensibles e intensivos en importaciones, ello esta lejos de ser un fenomeno transitorio, lo que esta pesando claramente en la reciente desaceleracion, y iii) la relevante contribucion de las CGV muestra un patron prociclico, cuestionando el caracter permanente de la actual nivelacion de los procesos de integracion vertical. Por el contrario, la ausencia de avances en la reduccion de aranceles de importacion y la relacion de complementariedad entre IED y comercio, usualmente olvidada, muestran un papel residual. Con todo, nuestros resultados sugieren implicaciones de politica economica sustanciales, ya que refuerzan la idea de un cambio historico hacia una nueva etapa «normal» de comercio internacional.