2013/10 | LEM Working Paper Series | |
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Estimating the elasticity of trade: the trade share approach |
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Mauro Lanati |
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Keywords | ||
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trade cost elasticity; gravity model; competitiveness equation;
trade share; gains from international trade
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JEL Classifications | ||
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F10, F11, F14
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Abstract | ||
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Recent theoretical work on international trade emphasizes the
importance of trade elasticity as the fundamental statistic needed to
conduct welfare analysis. Eaton and Kortum (2002) proposed a two-step
method to estimate this parameter, where exporter fixed effects are
regressed on proxies for technology and wages. Within the same
Ricardian model of trade, the trade share provides an alternative
source of identication for the elasticity of trade. Following Santos
Silva and Tenreyro (2006) both trade share and EK models are estimated
using OLS and Poisson PML to test for the presence of
heteroskedasticity-type-of-bias. The evidence from both specifications
suggests that the bias in the OLS estimates significantly impacts the
magnitude of trade cost elasticity. The welfare analysis reveals that
the resulting extreme variability of the trade cost elasticity and the
imposition of a common manufacturing share parameter for all countries
generate substantial distortions in the calculation of benefits from
trade.
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