DP717 | Estimates of Bilateral Trade Elasticities and Their Implications for the Modelling of `1992'

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In this paper we use detailed trade and production data and a theoretically consistent model of demand - the Almost Ideal Demand System - to estimate bilateral trade elasticities, the key parameters required for quantification of the effects of the `1992' programme. Initial results for 70 West German manufacturing industries suggest that price elasticities are relatively low. The robustness of this result is assessed, firstly, using different data - for 15 Italian industries - and secondly, using a more restrictive form of the demand system, the CES model. In both these cases the earlier conclusions are reinforced. If the responsiveness to price changes is really as low as these results suggest the effects of `1992' may be quite different from that normally discussed. The impact of the programme will be felt most strongly in those industries currently subject to quantitative constraints.