Trade Coefficients and the Role of Elasticity in a Spatial CGE Model Based on the Armington Assumption

Ando Asao, Bo Meng and Chao Qu

No 204, IDE Discussion Papers from Institute of Developing Economies, Japan External Trade Organization(JETRO)

Abstract: The Armington Assumption in the context of multi-regional CGE models is commonlyinterpreted as follows: Same commodities with different origins are imperfect substitutes for eachother. In this paper, a static spatial CGE model that is compatible with this assumption andexplicitly considers the transport sector and regional price differentials is formulated. Tradecoefficients, which are derived endogenously from the optimization behaviors of firms andhouseholds, are shown to take the form of a potential function. To investigate how the elasticityof substitutions affects equilibrium solutions, a simpler version of the model that incorporatesthree regions and two sectors (besides the transport sector) is introduced. Results indicate: (1) ifcommodities produced in different regions are perfect substitutes, regional economies will beeither autarkic or completely symmetric and (2) if they are imperfect substitutes, the impact ofelasticity on the price equilibrium system as well as trade coefficients will be nonlinear andsometimes very sensitive.

Keywords: Armington Assumption; Spatial CGE; Elasticity of substitution; Trade coefficient; Econometric model (search for similar items in EconPapers)
JEL-codes: C68 R13 R15 (search for similar items in EconPapers)
Date: 2009-01-01
New Economics Papers: this item is included in nep-cmp, nep-geo and nep-ure
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Published in IDE Discussion Paper = IDE Discussion Paper, No. 204. 2009-01-01

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