Bilateral multifactor CES general equilibrium with state-replicating Armington elasticities

Abstract

We measure elasticity of substitution between foreign and domestic commodities by two-point calibration, such that the Armington aggregator can replicate the two temporally distant observations of market shares and prices. Along with the sectoral multifactor CES elasticities which we estimate by regression using a set of disaggregated linked input–output observations, we integrate domestic production of two countries, namely, Japan and the Republic of Korea, with bilateral trade models and construct a bilateral general equilibrium model. Finally, we make an assessment of a tariff elimination scheme between the two countries.