FOREIGN-DOMESTIC SUBSTITUTION, IMPORT PENETRATION AND CGE MODELLING

Kenneth Clements, Marc Jim Mariano and George Verikios
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Marc Jim Mariano: KPMG Economics

No 20-13, Economics Discussion / Working Papers from The University of Western Australia, Department of Economics

Abstract: Foreign-domestic substitution elasticities (the so-called “Armington elasticities”) determine the degree of competitiveness in demand between similar products produced in different countries and are key parameters in a variety of numerical models of international trade. Armington elasticities are part of the explanation of the large increases in market shares of foreign products relative to locally produced ones in Australia, for example. The existing literature provides only limited evidence on these elasticities for Australia with the most disaggregated produced some time ago by Alaouze et al. (1977). This paper provides up-to-date parametric estimates of Armington elasticities for Australia with a reasonable degree of sectoral disaggregation. We use 22-years of data for 20 types of merchandise commodities, using OLS, panel and restricted-panel approaches. Our estimates range from 0.30 to 2.26, with higher elasticities for Transport and Equipment products and lower ones for Energy and. We illustrate the use of our elasticities with a trade-policy simulation using a computable generable equilibrium model of the Australian economy. We analyse the sensitivity of the results to the Armington elasticities by also using those estimated by Alaouze et al. (1977). We find an overestimation of economic effects when using the old Armington values.

Keywords: Foreign-domestic substitution; Armington elasticities; CGE analysis; International trade; Tariff policy (search for similar items in EconPapers)
Pages: 39
Date: 2020
New Economics Papers: this item is included in nep-cmp and nep-int
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Journal Article: Foreign-domestic substitution, import penetration and CGE modelling (2021)
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