The Elasticity of Trade: Estimates and Evidence

52 Pages Posted: 24 Feb 2011

See all articles by Ina Simonovska

Ina Simonovska

University of California - Davis; National Bureau of Economic Research (NBER)

Michael E. Waugh

New York University (NYU), Leonard N. Stern School of Business, Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: February 23, 2011

Abstract

Quantitative results from a large class of international trade models depend critically on the elasticity of trade with respect to trade frictions. We develop a simulated method of moments estimator to estimate this elasticity from disaggregate price and trade-flow data using the Ricardian model. We motivate our estimator by proving that the estimator developed in Eaton and Kortum (2002) is biased in any finite sample. We quantitatively show that the bias is severe and that the data requirements necessary to eliminate it in practice are extreme. Applying our estimator to new disaggregate price and trade-flow data for 123 countries in the year 2004 yields a trade elasticity of roughly four, nearly fifty percent lower than Eaton and Kortum’s (2002) approach. This difference doubles the welfare gains from international trade.

Keywords: elasticity of trade, bilateral, gravity, price dispersion, indirect inference

JEL Classification: F100, F110, F140, F170

Suggested Citation

Simonovska, Ina and Waugh, Michael E., The Elasticity of Trade: Estimates and Evidence (February 23, 2011). CESifo Working Paper Series No. 3356. Available at SSRN: https://ssrn.com/abstract=1767871

Ina Simonovska (Contact Author)

University of California - Davis ( email )

1 Shields Ave
Davis, CA 95616
United States

HOME PAGE: http://inasimonovska.weebly.com/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Michael E. Waugh

New York University (NYU), Leonard N. Stern School of Business, Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States

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