IDEAS home Printed from https://ideas.repec.org/p/uwa/wpaper/20-13.html
   My bibliography  Save this paper

Foreign-Domestic Substitution, Import Penetration And Cge Modelling

Author

Listed:
  • Kenneth W. Clements

    (Economics Discipline, Business School, University of Western Australia)

  • Marc Jim Mariano

    (KPMG Economics)

  • George Verikios

    (KPMG Economics and Griffith University)

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.

Suggested Citation

  • Kenneth W. Clements & Marc Jim Mariano & George Verikios, 2020. "Foreign-Domestic Substitution, Import Penetration And Cge Modelling," Economics Discussion / Working Papers 20-13, The University of Western Australia, Department of Economics.
    • Handle: RePEc:uwa:wpaper:20-13
    Note: MD5 = d163165977623287eb09d144ebb6ad43
    as

    Download full text from publisher

    File URL: https://ecompapers.biz.uwa.edu.au/paper/PDF%20of%20Discussion%20Papers/2020/DP%2020.13_Clements%20Mariano%20and%20Verikios.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    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.
    2. McDaniel, Christine A. & Balistreri, Edward J., 2002. "A Discussion on Armington Trade Substitution Elasticities," Working Papers 15856, United States International Trade Commission, Office of Economics.
    3. Zhai, Fan, 2008. "Armington Meets Melitz: Introducing Firm Heterogeneity in a Global CGE Model of Trade," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 23, pages 575-604.
    4. Xiao-guang Zhang & George Verikios, 2006. "Armington Parameter Estimation for a Computable General Equilibrium Model: A Database Consistent Approach," Economics Discussion / Working Papers 06-10, The University of Western Australia, Department of Economics.
    5. Robert S. Chirinko, 2008. "ó: The Long And Short Of It," CESifo Working Paper Series 2234, CESifo.
    6. Xiao-guang Zhang, 2006. "Armington Elasticities and Terms of Trade Effects in Global CGE Models," Staff Working Papers 0601, Productivity Commission, Government of Australia.
    7. Shoven,John B. & Whalley,John, 1992. "Applying General Equilibrium," Cambridge Books, Cambridge University Press, number 9780521266550, October.
    8. Peter Lloyd & Xiao-guang Zhang, 2006. "The Armington Model," Staff Working Papers 0602, Productivity Commission, Government of Australia.
    9. Chirinko, Robert S., 2008. "[sigma]: The long and short of it," Journal of Macroeconomics, Elsevier, vol. 30(2), pages 671-686, June.
    10. Olekseyuk, Zoryana & Schürenberg-Frosch, Hannah, 2016. "Are Armington elasticities different across countries and sectors? A European study," Economic Modelling, Elsevier, vol. 55(C), pages 328-342.
    11. Cassoni, Adriana & Flores, Manuel, 2008. "Methodological shortcomings in estimating Armington elasticities," MPRA Paper 34544, University Library of Munich, Germany, revised 2009.
    12. Chris M. Alaouze & John S. Marsden & John Zeitsch, 1977. "Estimates of the Elasticity of Substitution Between Imported and Domestically Produced Commodities at the Four Digit ASIC Level," Centre of Policy Studies/IMPACT Centre Working Papers o-11, Victoria University, Centre of Policy Studies/IMPACT Centre.
    13. Josef Bajzik & Tomas Havranek & Zuzana Irsova & Jiri Schwarz, 2019. "Estimating the Armington Elasticity: The Importance of Data Choice and Publication Bias," Working Papers IES 2019/19, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Jul 2019.
    14. Olekseyuk, Zoryana & Schürenberg-Frosch, Hannah, 2014. "Are Armington Elasticities Different across Countries and Sectors? – A European Study," Ruhr Economic Papers 513, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    15. McKitrick, Ross R., 1998. "The econometric critique of computable general equilibrium modeling: the role of functional forms," Economic Modelling, Elsevier, vol. 15(4), pages 543-573, October.
    16. Chris M. Alaouze, 1977. "Estimation of the elasticity of substitution between imported and domestically produced intermediate inputs," Centre of Policy Studies/IMPACT Centre Working Papers op-16, Victoria University, Centre of Policy Studies/IMPACT Centre.
    17. Clinton R. Shiells & Kenneth A. Reinert, 1993. "Armington Models and Terms-of-Trade Effects: Some Econometric Evidence for North America," Canadian Journal of Economics, Canadian Economics Association, vol. 26(2), pages 299-316, May.
    18. Bandara, Jayatilleke S, 1991. "Computable General Equilibrium Models for Development Policy Analysis in LDCs," Journal of Economic Surveys, Wiley Blackwell, vol. 5(1), pages 3-69.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    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).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bajzik, Josef & Havranek, Tomas & Irsova, Zuzana & Schwarz, Jiri, 2020. "Estimating the Armington elasticity: The importance of study design and publication bias," Journal of International Economics, Elsevier, vol. 127(C).
    2. Josef Bajzik & Tomas Havranek & Zuzana Irsova & Jiri Schwarz, 2019. "The Elasticity of Substitution between Domestic and Foreign Goods: A Quantitative Survey," Working Papers 2019/12, Czech National Bank.
    3. Bajzik, Jozef & Havranek, Tomas & Irsova, Zuzana & Schwarz, Jiri, 2019. "Estimating the Armington Elasticity: The Importance of Data Choice and Publication Bias," MPRA Paper 95031, University Library of Munich, Germany.
    4. Delahaye, Elliot & Milot, Catherine, 2020. "Measuring the UK Economy’s Armington Elasticities," Conference papers 333170, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    5. Cassoni, Adriana & Flores, Manuel, 2008. "Methodological shortcomings in estimating Armington elasticities," Conference papers 331813, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    6. Miguel, Carlos de & O'Ryan, Raúl & Pereira, Mauricio & Carriquiri, Bruno, 2009. "Energy shocks, fiscal policy and CO2 emissions in Chile," Conference papers 331817, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    7. Mark Partridge & Dan Rickman, 2010. "Computable General Equilibrium (CGE) Modelling for Regional Economic Development Analysis," Regional Studies, Taylor & Francis Journals, vol. 44(10), pages 1311-1328.
    8. Johannes Ziesmer & Ding Jin & Sneha D Thube & Christian Henning, 2023. "A Dynamic Baseline Calibration Procedure for CGE models," Computational Economics, Springer;Society for Computational Economics, vol. 61(4), pages 1331-1368, April.
    9. Arndt, Channing & Robinson, Sherman & Tarp, Finn, 2002. "Parameter estimation for a computable general equilibrium model: a maximum entropy approach," Economic Modelling, Elsevier, vol. 19(3), pages 375-398, May.
    10. María C. Latorre, 2009. "The economic analysis of multinationals and foreign direct investment: a review," Hacienda Pública Española / Review of Public Economics, IEF, vol. 191(4), pages 97-126, December.
    11. Erwin Corong & Thomas Hertel & Robert McDougall & Marinos Tsigas & Dominique van der Mensbrugghe, 2017. "The Standard GTAP Model, version 7," Journal of Global Economic Analysis, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University, vol. 2(1), pages 1-119, June.
    12. Zafar Iqbal & Rizwana Siddiqui, 2001. "Critical Review of Literature on Computable General Equilibrium Models," MIMAP Technical Paper Series 2001:09, Pakistan Institute of Development Economics.
    13. Haider A. Khan, 2007. "Social Accounting Matrix: A Very Short Introduction for Economic Modeling," CIRJE F-Series CIRJE-F-477, CIRJE, Faculty of Economics, University of Tokyo.
    14. 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.
    15. Pavel Ciaian & Andrey Ivanov & d'Artis Kancs, 2019. "Universal basic income: A viable policy alternative?," The World Economy, Wiley Blackwell, vol. 42(10), pages 2975-3000, October.
    16. Christoph Görtz & Christopher Gunn & Thomas Lubik, 2018. "Taking Stock of TFP News Shocks: The Inventory Comovement Puzzle," Carleton Economic Papers 18-05, Carleton University, Department of Economics, revised 14 Jul 2018.
    17. Itakura, Ken & Oyamada, Kazuhiko, 2014. "Examining Trade Response of Armington-Krugman-Melitz Encompassing Module in a CGE Model," Conference papers 332513, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    18. Hertel, Thomas & Hummels, David & Ivanic, Maros & Keeney, Roman, 2007. "How confident can we be of CGE-based assessments of Free Trade Agreements?," Economic Modelling, Elsevier, vol. 24(4), pages 611-635, July.
    19. Christoph Görtz & Christopher Gunn & Thomas Lubik, "undated". "What Drives Inventory Accumulation? News on Rates of Return and Marginal Costs," Carleton Economic Papers 19-09, Carleton University, Department of Economics.
    20. Fernando del Río & Francisco‐Xavier Lores, 2023. "Accounting for the role of investment frictions in recessions," Economica, London School of Economics and Political Science, vol. 90(360), pages 1089-1118, October.

    More about this item

    Keywords

    Foreign-domestic substitution; Armington elasticities; CGE analysis; International trade; Tariff policy;
    All these keywords.

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:uwa:wpaper:20-13. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sam Tang (email available below). General contact details of provider: https://edirc.repec.org/data/deuwaau.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.