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Foreign-domestic substitution, import penetration and CGE modelling

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  • Kenneth W. Clements
  • Marc Jim M. Mariano
  • George Verikios

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 in 1977 by Alaouze and colleagues.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 Minerals. 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 the previous estimates of Alaouze and colleagues. We find an overestimation of economic effects when using the old Armington values.

Suggested Citation

  • Kenneth W. Clements & Marc Jim M. Mariano & George Verikios, 2021. "Foreign-domestic substitution, import penetration and CGE modelling," Applied Economics, Taylor & Francis Journals, vol. 53(35), pages 4080-4099, July.
    • Handle: RePEc:taf:applec:v:53:y:2021:i:35:p:4080-4099
    DOI: 10.1080/00036846.2021.1897072
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    1. Peter Dixon & Michael Jerie & Maureen Rimmer, 2016. "Modern Trade Theory for CGE Modelling: The Armington, Krugman and Melitz Models," Journal of Global Economic Analysis, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University, vol. 1(1), pages 1-110, June.
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    Cited by:

    1. Marc Jim M. Mariano & George Verikios & Kenneth W. Clements, 2023. "Are Input-Output Coefficients Really Fixed?," Economics Discussion / Working Papers 23-06, The University of Western Australia, Department of Economics.
    2. Marc Jim Mariano & George Verikios, 2022. "Understanding the Effects of Coronavirus on Australian Households: A Macro–Micro Analysis," Economic Papers, The Economic Society of Australia, vol. 41(3), pages 215-231, September.
    3. Clements, Kenneth W. & Mariano, Marc Jim M. & Verikios, George & Wong, Berwyn, 2022. "How elastic is alcohol consumption?," Economic Analysis and Policy, Elsevier, vol. 76(C), pages 568-581.
    4. Karen Turner & Julia Race & Oluwafisayo Alabi & Antonios Katris & Kim Swales, 2023. "The relationship between a ‘polluter pays’ approach to carbon capture, regional policy and ‘just transition’ employment agendas," Climate Policy, Taylor & Francis Journals, vol. 23(3), pages 366-378, March.
    5. Clements, Kenneth & Mariano, Marc Jim & Verikios, George, 2022. "Expenditure patterns, heterogeneity, and long-term structural change," Economic Modelling, Elsevier, vol. 113(C).

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