Estimating Import Price
Elasticities, Adjusting for Quality
A. Fougeyrollas, N. Lancesseur,
T. Thanagopal
ERASME (Ecole Centrale Paris)
WIOD Meeting - May 25th-26th-27th 2011 - IPTS, Sevilla
feedbacks
• Exchange rates can be different between
sectors and if we use output, or Intermediate
consumption or Value added as a benchmark.
• Output minus intermediate consumption
don’t always give the right Value added.
2
Outline
 The following estimations are a very preliminary
work
Two questions :
 Does the three demand types exhibits the same price
elasticities ?
 If we take “quality effects” into account, are the
elasticities modified ?
3
I. First model
I.I. Specification (1)
 M imports, P relative prices and DT total demand addressed
to the sector
 i country of origin,
 s industry
 d demand type (Consumption ….)
4
I. First model
I.II. Methodology (1)
 For testing we pooled imports coming from 7 countries (DEU,
BEL, ITA, JAP, USA, NLD and ESP)
 Fixed effect approach : least squares dummy variable (LSDV)
regression model. We define a set of dummy variables
where
is equal to 1 in the case of an observation relating
to individual i and 0 otherwise. The model can be rewritten as
follows:
5
I. First model
I.III. Methodology (2)
 We noticed autocorrelation that for some sectors errors
(using the Breush-Godfrey test)
 corrected using Cochrane-Orcutt procedure
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I. First model
I.III. Results (1)
Consumption
GFCF
Intermediate Consumption
Price elasticity
R²
Price elasticity
R²
Price elasticity
R²
2.12***
0.87
-
-
0,47***
0.98
2.17***
0.88
-
-
0,12
0.96
1.13***
0.89
-
-
0,92***
0.92
1.08
0.34
-
-
1,94**
0.95
Other Non-Metallic Mineral
1.83***
0.73
-
-
0,65***
0.91
Basic Metals and Fabricated
Metal
1.19**
0.91
0.47
0.9
0,16
0.85
0.3
0.4
1.37***
0.95
1,91***
0.92
2.78***
0.76
0.8***
0.91
0,72***
0.91
Textiles and Textile Products
Wood and Products of Wood and
Cork
Coke, Refined Petroleum and
Nuclear Fuel
Chemicals and Chemical
Products
Electrical and Optical Equipment
Transport Equipment
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I. First model
I.IV. Results (2)
 The price elasticities of import differ depending on the
type of demand
 The elasticities are higher in the case of final
consumption (compared to IC and GFCF)
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II. Second model
II.I. Introduction
 Import price elasticity tends to be underestimated since
the prices do not take into account the quality effects
 Quality innovation is becoming more and more
important particularly in developed countries, as such,
ignoring the influence of product quality might bias
import price elasticity and therefore debates on trade
competitiveness.
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II. Second model
II.II. Specification
 We used a gravity model (Bergstrand [2002]) and we
introduced a quality proxy. This model concerns
exclusively imports demanded by consumers.

reflects the value of manufactures imports from
country i (exporter) to j (importer) for goods produced by
the sector s
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II. Second model
II.II. Specification (2)






reflects export potential of country j in sector s
refers to the price index of importer in sector s
is a proxy for the quality of foreign goods
records the distance between the two trading partners
refers to the importer-industry fixed effects
refers to the elasticity of substitution between domestic
and foreign goods
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II. Second model
II.III. Variables (1)
 Export potential:
 Theory says (Melitz [2003]) that the probability of a firm to
export is increasing with its size.
 Hence, we wanted to use a data which could capture this
information but it does not exists, so we use the number of
employees in the sector as a proxy.
 Price index
 Prices are derived from unit values i.e they are obtained by
dividing the value of trade by its volume
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II. Second model
II.III. Variables (2)
 Quality proxy variable:
 The knowledge variable of the NEMESIS model is used: it is calculated
as the R&D expenditures (EUKLEMS data) of a sector and R&D
expenditures from other sectors (spillovers) are added via technology
flow matrices.
 The quality of products should improve with the R&D expenditures of
the corresponding sector. Thus, it should also increase the
competitiveness on the international markets of this sector.
 Distance
 Distance is obtained by calculating the distance between the largest
city in the country (CEPII data)
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II. Second model
II.IV. Sample
 We use a sample of 9 countries (DE, DK, ES, FI, FR, IE, IT,
NL, UK)
 Time frame: 1996-2003
 Cities considered for distance: Essen, Copenhagen,
Madrid, Helsinki, Paris, Dublin, Rome, Amsterdam and
London
 Data obtained for 18 sectors (only goods sectors)
 Data sources: cepii website, EUKLEMS, Wiod
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II. Second model
II.V. Methodology
 We did two panel regressions, pooling imports by
country and then by sector
 Three estimation method:
 OLS (with fixed effect)
 2sls (using lag as instruments)
 Poisson regression : to account for missing trade values
(Westerland and Wilhelmsson [2006])
 The following tables concern OLS results because they
were the most robust
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Initial σ
R-square
Adjusted σ
R-square
Quality
Agriculture
0.707
0.261
0.715
0.291
-0.050
GasDistribution
2.441
0.214
2.532
0.211
0.624
Refined Oil
-0.434
0.131
-0.588
0.104
0.259
Electricity
0.463
0.277
0.396
0.278
0.301
Ferrous and Non-Ferrous Metals
0.761
0.132
0.962
0.104
1.382
Non-metallic mineral products
0.892
0.178
1.113
0.191
0.837
Chemicals
-0.576
0.134
0.864
0.176
1.869
Metal Products
0.465
0.182
0.963
0.186
0.540
Agricultural and Industrial Machines
-0.682
0.286
0.021
0.236
0.965
Office Machines
0.499
0.446
0.500
0.441
-0.019
Electrical Goods
-0.142
0.221
0.592
0.236
1.202
Transport Equipment
-0.057
0.164
1.719
0.175
0.992
Food, Drink and Tobacco
0.008
0.221
0.274
0.193
0.235
Textiles, Cloth and Footwear
1.817
0.132
2.125
0.143
0.273
Name
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II. Second model
II.VI. Results (1)
 Adjusting for quality does increase the import price
elasticities under all estimations except for the Poisson
estimation
 For most of the sectors, the impact of quality innovation
is positive and highly significant
 A 1% increase of product quality leads to higher imports
varying between 0.2% and 2%.
 Distance, as expected, varies negatively and significantly
with trade flows
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Importing Country
Initial Import Price
R-square
Elasticity
Adjusted Import Price
R-square
Elasticity
DE (Germany)
0.796
0.238
1.124
0.534
DK (Denmark)
0.418
0.294
0.487
0.421
ES (Spain)
-0.746
0.453
-0.563
0.487
FI (Finland)
0.169
0.283
0.230
0.354
FR (France)
0.787
0.296
0.887
0.485
IE (Ireland)
1.291
0.245
1.557
0.454
IT (Italy)
-0.247
0.263
0.232
0.425
NL (Netherlands)
1.481
0.293
1.577
0.450
UK (United Kingdom)
0.218
0.140
1.243
0.424
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II. Second model
II.VI. Results (2)
 All the countries in the sample do improve their import
price elasticities when they have been adjusted for
quality effects
 In conclusion of the second section, although it was a
very preliminary work, we showed with all these model
that the import price elasticities were underestimated
when the quality was not taken into account.
 It means that industrial policies should also enhance R&D
expenditure to improve quality of products as well as
competitiveness.
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