Armington elasticity and development

Armington Elasticity (AE) is the elasticity of substitution among varieties of the same product produced by different countries. AE is part of standard methodology for representing region specific preferences in international trade. The contribution of this paper is to systematically model the role of technological and economic progress in evolution of AE and consumer preferences. A model is constructed to account for 1) technological progress influencing AE, as substitution becomes easier when varieties embody equally developed technology and 2) steadier demand for technology intensive products as the economy develops and incomes rise. Our model yields a framework where technology, market shares, and consumers’ demand for technologically advanced products are linked. Our simulations present the implications for the competitiveness of the domestic variety over the course of economic development. This framework has theoretical, practical, and policy applications in international trade. We provide illustrations of how the framework can be used to analyze the conditions for successful government policy interventions in
trade.