THE APPLICATION OF THE CES UTILITY APPROACH TO THE ESTIMATION OF BILATERAL FLOWS IN A TRADE MATRIX

Ashok Parikh*

Pakistan Journal of Applied Economics, 1987, vol. 6, issue 2, 71-101

Abstract: The estimation and forecasting of trade shares is attempted in a world framework for major trading countries on the basis of data on bilateral flows for the period 1965 – 1980 for manufactures and chemicals [Standard International Trade Classification (SITC), (5) to (8)J . The assumptions of separability and homotheticity are made to obtain an operational Hickman-Lau model from Armington’s approach in which products are distinguished not only by their kind but by their place of production. The problem of heteroscedasticity is encountered and estimates of elasticities of substitution are obtained using the most general form of the mode1. The results are compared with the Gana, Hickman, Lau, and Jacobson (1979) study. The estimates of substitution elasticities based on 1965 – 1980 data are lower than the ones obtained using 1960- 1970 data and it is argued that the flexible exchange rate (and the agents’ responses) could be responsible for low substitution elasticities when the period after 1973 is included.

Date: 1987
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