Econometric Analysis of Demand for Dairy Products in Japan

An Estimation of "Micro" and "Macro" Elasticities of Substitution

Abstract

Impact of tariff elimination on food is a prime concern for domestic suppliers in Japan. The standard method to calculate the impact is CGE analysis using the GTAP model. In the GTAP model, however, the demand-side elasticity of substitution follows the "Rule of Two", so that the value of the elasticity between domestic and foreign varieties ("macro" elasticity) is half of that among foreign varieties ("micro" elasticity). Econometric estimation is required since it plays an important role in the simulation analysis applied to trade policy. With due consideration to the above, the purpose of this study is to estimate "micro" and "macro" elasticities using Feenstra et al.'s method. The estimation results reveal that the estimated elasticities econometrically tend to be different from those of the GTAP value.