Re-estimating International Elasticity of Substitution – A Preliminary Study of Impact of Quality on Trade

Increasingly many developed countries are losing their export market
shares to lower priced emerging countries. Emerging countries unlike
higher wage developed countries are able to produce a similar product
to be traded at a lower cost. To regain its competitive streak, developed
countries would need to compete in terms of higher quality products
rather than lower priced products. This paper, thus, attempts to
quantify the effect of higher quality goods trade within Europe. Using a
panel data comprising of 11 European countries for a total of 15
manufacture goods sectors ranging over 14 years (from 1990 to 2003),
the paper attempts to re-estimate import elasticities of substitution and
quality elasticities to determine the relative strength of Europe in terms
of offering lower prices or higher quality products. This paper concludes
that improving product quality is important for trade and such product
improvement is much more beneficial to European countries in sectors
that produce differentiated goods rather than homogeneous ones.

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