International trade without CES: Estimating translog gravity

Abstract

This paper derives a micro-founded gravity equation based on a translog demand system that allows for flexible substitution patterns across goods. In contrast to the standard CES-based gravity equation, translog gravity generates an endogenous trade cost elasticity. Trade is more sensitive to trade costs if the exporting country only provides a small share of the destination country's imports. As a result, trade costs have a heterogeneous impact across country pairs, with some trade flows predicted to be zero. I test the translog gravity equation and find empirical evidence that is in many ways consistent with its predictions.JEL classification: F11, F12, F15

Constant versus variable markups: Implications for the law of one price

“…Compared to the existing literature, this empirical innovation is closely related to a study by Novy (2013) who has shown that translog demand systems also correspond to lin-log regressions under certain circumstances. However, such regressions implied by translog demand systems cannot distinguish between the elasticity of demand/substitution and the distance elasticity of trade costs, where the former is the key to measure and identity markups as in this paper.…”

“…5 Using the NBER-UN data on quantity traded and unit prices covering bilateral trade between 171 countries for 749 good categories, we estimate trade patterns implied by the model (i.e., logis also considered; the rest of this paper will follow these utility functions in order to distinguish between constant for other speci…cations in the literature under which variable markups can be obtained. 5 Using lin-log regressions, Novy (2013) considers the endogeneity of the trade cost elasticity to focus on the heterogeneous impact of trade costs across country pairs, while this paper deviates by considering the endogeneity of the elasticity of demand to investigate the implications on LOP. Another dimension that this paper deviates from Novy (2012) is that he uses total exports data amongst 28 OECD countries, while we use a good-category level data covering the globe.…”

Nonparametric Counterfactual Predictions in Neoclassical Models of International Trade

“…Exploring the quantitative implications of using these two different approaches, under various assumptions about the true demand system, is an interesting topic for future research. 38 The translog demand system-as used in the Armington context by Novy (2013)-is an important exception not covered by the demand system in (28). One way to nest both CES and translog would be to use the CES-translog demand system introduced by Pollak, Sickles, and Wales (1984).…”

A Panel Data Analysis of Chinas Trade Pattern with OPEC Members: Gravity Model Approach

“…There is great number of studies exploring the links in bilateral trade flows through the gravity model approach which is a distinguished contrivance to model international trade flows among nations, trading agreements and even between continents (Brun et al, 2002); (Redding and Venables, 2004); (Liu and Xin, 2011); (Novy, 2013); (Fung, 2014); (Ulengin et al, 2015); (Rasoulinezhad and Kang, 2016); (Rasoulinezhad, 2017); ; (Muhammad et al, 2018). The first eminent study exploring trade flows goes back to Jan Tinbergen"s article "Shaping the world economy: propositions for an international economic policy" long ago in Overall, it can be seen that there has not been a serious attempt to examine China-OPEC bilateral trade.…”