DP9951 In Search of the Armington Elasticity

Author(s): Robert Feenstra, Philip Luck, Maurice Obstfeld, Katheryn N. Russ
Publication Date: April 2014
Keyword(s): Armington elasticity, CGE trade models, disaggregate trade equations, effects of devaluation, elasticity of trade
JEL(s): F12, F14, F42
Programme Areas: International Macroeconomics, International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9951

The elasticity of substitution between goods from different countries?the Armington elasticity?is important for many questions in international economics, but its magnitude is subject to debate: the "macro" elasticity between home and import goods is often found to be smaller than the "micro" elasticity between foreign sources of imports. We investigate these two elasticities in a model using a nested CES preference structure. We explore estimation techniques for the macro and micro elasticities using both simulated data from a Melitz-style model, and highly disaggregate U.S. production data matched to Harmonized System trade data. We find that in up to one-half of goods there is no significant difference between the macro and micro elasticities, but in the other half of goods the macro elasticity is significantly lower than the micro elasticity, even when they are estimated at the same level of disaggregation.