Estimation of Armington elasticities for trade-policy analysis

Abstract

The purpose of this paper is to compare the Armington elasticities for world average values and country-specific values and obtain evidence for whether the world average elasticities and the “rule of two”, which have been applied in many papers, are accurate for cereals in trade policy studies related to an individual country.,The authors use panel data with a nested model to estimate and compare Armington elasticities based on world average values and country-specific values from 10 countries and regions.,The results suggest that cereals’ elasticities vary between world average values and country-specific values, and the “rule of two” is not strictly applicable. In fact, the “less than two” concept fits well in many cases.,This study sheds light on the effects of country heterogeneity on the elasticities and the accuracy of using world average elasticities in a trade policy study for an individual country. In addition, this paper offers estimated values of country-specific elasticities for 10 countries and regions.