An Economic Derivation on Trade Coefficients under the Framework of Multi-regional I-O Analysis

The gravity model, entropy model, potential type model and others like these have been adopted to formulate interregional trade coefficients under the framework of Multi-Regional I-O (MRIO) analysis. Since most of these models are based upon analogies in physics or on statistical principles, they do not provide a theoretical explanation from the view of a firm's or individual's rational and deterministic decision making. In this paper, according to the deterministic choice theory, not only is an alternative formulation of the trade coefficients presented, but also a discussion of an appropriate definition for purchasing prices indices. Since this formulation is consistent with the MRIO system, it can be employed as a useful model-building tool in multi-regional models such as the spatial CGE model.

Trade Coefficients and the Role of Elasticity in a Spatial CGE Model Based on the Armington Assumption

The Armington Assumption in the context of multi-regional CGE models is commonly interpreted as follows: Same commodities with different origins are imperfect substitutes for each other. In this paper, a static spatial CGE model that is compatible with this assumption and explicitly considers the transport sector and regional price differentials is formulated. Trade coefficients, which are derived endogenously from the optimization behaviors of firms and households, are shown to take the form of a potential function. To investigate how the elasticity of substitutions affects equilibrium solutions, a simpler version of the model that incorporates three regions and two sectors (besides the transport sector) is introduced. Results indicate: (1) if commodities produced in different regions are perfect substitutes, regional economies will be either autarkic or completely symmetric and (2) if they are imperfect substitutes, the impact of elasticity on the price equilibrium system as well as trade coefficients will be nonlinear and sometimes very sensitive.

How serious is the omission of bilateral tariff rates in gravity?

In this paper, using the worldwide dataset of bilateral tariff rates, we explore how serious the omission of bilateral tariff rates in gravity is. Our findings are as follow. Firstly, the omission of bilateral tariff rates seems not to be so serious in terms of omitted-variable biases because the coefficients for the usual gravity variables do not change before or after their inclusion. Secondly, while the widely-used dummy variable of regional trade agreement could not play an alternative role in place of tariff rates, the inclusion of time-invariant pair fixed effects in addition to the time-variant importer fixed effects and exporter fixed effects accounts for the omission of tariff rates. The inclusion of those fixed effects makes the coefficient for bilateral tariff rates insignificant.