Working Paper: NBER ID: w16796
Authors: Ina Simonovska; Michael E. Waugh
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 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. This difference doubles the welfare gains from international trade.
Keywords: trade elasticity; structural gravity models; welfare gains from trade
JEL Codes: F10; F11; F14; F17
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade elasticity (H30) | welfare gains from trade (F10) |
| upward bias in Eaton and Kortum's estimator (C51) | overestimation of trade elasticity (F14) |
| sample size increases (C83) | convergence to true elasticity of trade (F11) |
| trade elasticity (H30) | understanding welfare costs of autarky (D69) |
| simulated method of moments estimator (C51) | trade elasticity (H30) |
| Eaton and Kortum's approach (F12) | trade elasticity (H30) |