Gravity Models of Trade with Variable Elasticity of Substitution

Student: Bulgakov Mikhail

Supervisor: Philip Ushchev

Faculty: St.Petersburg School of Economics and Management

Educational Programme: Applied Economics and Mathematical Methods (Master)

Final Grade: 9

Year of Graduation: 2018

We develop a gravity model in which the demand system is “almost CES”. This model allows to study the anatomy of new effects which arise when the elasticity of substitution is no longer constant but only slightly variable. We use this model to develop an improved procedure of estimating gravity models. We formulate a structural gravity equation in the non-CES case. The form of gravity equation let us to estimate the residuals of “classical” gravity estimation in the empirical context of the well-known US-Canadian “border puzzle” and confirm correctness of the model. Also we study what happens with parameters of the model when CES-model is slightly perturbed — how perturbations affect the prices, demand system and number of firms at the market.

Full text (added May 28, 2018)

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