How strong is the UKs preference for more variety?

Thomas Ellis-Rees, Laura Hosford, Siobhan Prendiville and Elliot Delahaye

No 333295, Conference papers from Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project

Abstract: Use of modern trade specifications which account for new trade theory and gains from increasing variety, such as Krugman (1980) and Melitz (2003), remains in its infancy in CGE modelling. Central to determining the gains from new product varieties and the impacts on welfare, trade patterns and factor returns is the elasticity of substitution between varieties. Thus, this paper develops the research underpinning these trade specifications by assessing a range of approaches for estimating substitution elasticities at the GTAP sector level. Soderbery (2015) showed that previous estimates of the elasticity of substitution were significantly biased in the US context. We apply this approach to produce estimates for the UK, extending it to provide estimates at the product and GTAP sector level. Our results corroborate Soderbery’s (2015), with our estimates between 15% and 39% lower than previous UK estimates, suggesting they understated the gains from product variety in the UK. Investigating the importance of aggregation, we find that estimates are sensitive to the level of aggregation methodology, with product level estimates significantly higher than their GTAP counterparts. Using CGE simulations, we demonstrate the importance of estimating parameters at the same level of aggregation as modelling is carried out on.

Keywords: Consumer/Household; Economics (search for similar items in EconPapers)
Date: 2021
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