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Title:The elasticity of trade: Estimates and evidence PDF Logo
Authors:Simonovska, Ina
Waugh, Michael
Issue Date:2011
Series/Report no.:Working Papers, University of California, Department of Economics 11,2
Abstract:Quantitative results from a large class of structural gravity models of international trade depend critically on the elasticity of trade with respect to trade frictions. We develop a new simulated method of moments estimator to estimate this elasticity from disaggregate price and trade-flow data and we use it within Eaton and Kortum's (2002) Ricardian model. We apply our estimator to new disaggregate price and trade-flow data for 123 countries in the year 2004. Our method yields a trade elasticity of roughly four, nearly fifty percent lower than Eaton and Kortum's (2002) approach. Moreover, robustness exercises result in trade elasticity estimates that are both lower and fall within a narrower range relative to the existing literature. This difference doubles the welfare gains from international trade.
Subjects:elasticity of trade
price dispersion
indirect inference
Document Type:Working Paper
Appears in Collections:Working Papers, Department of Economics, UC Davis

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