The Elasticity of Trade: Estimates and Evidence

Abstract

Quantitative results from a large class of structural gravity models of international trade depend critically on the elasticity of trade with respect to trade frictions.We develop a new simulated method of moments estimator to estimate this elasticity from disaggregate price and trade-flow data and we use it within Eaton and Kortum's (2002) Ricardian model.We apply our estimator to disaggregate price and trade-flow data for 123 countries in the year 2004.Our method yields a trade elasticity of roughly four, nearly fifty percent lower than Eaton and Kortum's (2002) approach.This difference doubles the welfare gains from international trade.

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