Estimating National and Foreign Trade Elasticities Using Generalized Transport Costs

Abstract

We introduce the definition of two distinct trade elasticities corresponding to imports from regions located in the same country (national elasticities) and foreign regions located in other countries (foreign elasticities). We resort to a three-tier nested CES utility structure to derive the corresponding demand gravity equations. In absence of tariffs within single markets, we identify and recover the elasticities through a precise measure of generalized transport cost that combines economic, engineering, and logistic criteria. Results using PPML estimation methods on EU trade data show that national elasticities double in value their foreign counterparts. Our estimates allow revisiting previous results on border effects, gains from trade, and CGEs.