Long-run supply effects and the elasticities approach to trade

Joseph Gagnon

No 754, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Krugman (1989) argued that differences across countries in estimated income elasticities of import demand are due to omission of an exporter supply effect. He showed that such an effect can be derived in a theoretical model with economies of scale in production and a taste for variety in consumption. In his model, countries grow by producing new varieties of goods, and they are able to export these goods without suffering any deterioration in their terms of trade. This paper analyzes U.S. import demand from different source countries and finds strong evidence of a supply effect of roughly half the magnitude (0.75) of the income elasticity (1.5). Price elasticities for the most part are estimated close to -1, which is typical for the literature. Exclusion of the supply effect leads to overestimation of the income elasticity. Results based on U.S. exports to different destinations are less robust, but largely corroborate these findings.

Keywords: Imports; International trade (search for similar items in EconPapers)
Date: 2003
New Economics Papers: this item is included in nep-afr
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Citations: View citations in EconPapers (18)

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