Estimating National and Foreign Trade Elasticities Using Generalized Transport Costs

Abstract

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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 CESutility structure to derive the corresponding demand gravity equations. In absence of tariffs within single markets, we identifyand recover the elasticities through a precise measure of generalized transport cost that combines economic, engineering, andlogistic criteria. Results using PPML estimation methods on EU trade data show that national elasticities double in value theirforeign counterparts. Our estimates allow revisiting previous results on border effects, gains from trade, and CGEs