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GTAP Resource #3763

"Shifting Armington trade preferences employing gravity models: Addressing the ‘small shares stay small’ problem. "
by Philippidis, George, Helena Resano, Ana Sanjuan, Mike Bourne and Elisavet Kitou

With significant improvements in computational facility, deterministic neoclassical computable general equilibrium (CGE) models have become an accepted workhorse for assessing ex-ante trade led benefits from bilateral (e.g., McDonald and Walmsley, 2008), regional (e.g., De Bruijn et al. 2008) and multilateral (e.g., Francois et al. 2005) accords. In most cases, the Global Trade Analysis Project (GTAP) database is utilised, implying the accompanying usage of a common underlying theoretical CGE model structure.
One departure from the neo-classical theory surrounds the assumption that domestic products and imports are perfect substitutes: an unsubstantiated supposition when examining empirical trade data. The standard CGE solution is to employ the Armington assumption. This import demand structure, typically employing the convenient constant elasticity of substitution (CES) function, links horizontal product differentiation with exogenous considerations related to region of origin, without the need to alter the perfectly competitive market structure within the model. Furthermore, the Armington treatment deals with imperfect transmission between world and domestic prices, whilst operationally speaking it offers analytical simplicity and computational ease given its parsimonious structure.
Notwithstanding, this modelling structure also has its pitfalls. On the one hand, it is assumed that all pair-wise substitution elasticities between bilateral routes of origin are identical. Other literature (Boadway and Treddenick, 1978; Brown, 1987) demonstrates the potentially unrealistic impacts of trade liberalisation on real income via exaggerated terms of trade effects. A further source of bias, which constitutes the focus of the present study, is the ‘small share stay small’ problem (Morkre and Tarr, 1993). More specifically, in those cases where exports from a potentially competitive supplier are severely limited by prohibitive trade barriers in the importer region, t...

Resource Details (Export Citation) GTAP Keywords
Category: 2012 Conference Paper
Status: Published
By/In: Presented at the 15th Annual Conference on Global Economic Analysis, Geneva, Switzerland
Date: 1991
Created: Philippidis, G. (3/14/2012)
Updated: Philippidis, G. (3/21/2012)
Visits: 1,953
- Preferential trading arrangements
- South America

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