Armington approach and the EK (Eaton and Kortum 2002) approach are the two most important workhorse models in bilateral trade modeling under perfect competition. The Armington approach has been extensively used in empirical work (e.g., GTAP models) while the EK approach has been increasingly employed in the trade literature. I have heard that the two models mirror each other. Could there be a mapping between the two?
I think there could be important differences between the two model. And the Armington approach may provide more flexible control on the substitutability (mobility) of goods from different origins. While on the other hand, the EK approach provides a very good, traceable, and micro-founded basis for the technology (goods) heterogeneity across origins. What do you think?
An Armington elasticity is an economic parameter commonly used in models of consumer theory and international trade. ... These models generate smaller and more realistic responses of trade to price changes than implied by models of homogeneous products.
On the other hand, Eaton and Kortum (2002) model provides intuitive and revealing counterfactual general equilibrium comparative statics. Our innovation is to bring in capital accumulation. Capital accumulation is at the heart of neoclassical growth models and intuitively must be richly connected with trade at multi-country level.
In terms of AE, it is considerable and can show the elasticity of substitution between products of different countries. If you intend to advance to the use of an international computable general equilibrium models (which is highly rigorous), then utilize both the Ek model and this to compare outputs or even for robustness checks perhaps. I suppose you're also concerned about the heterogeneity of the tradable and non-tradable goods you're interested in looking at.
Armington is mainly concerned with consumption preference whereas Eaton and Kortum examine input trade. I wonder whether two approaches can be compared in an ordinary sense of the word comparison.
As for Eaton and Kortum approach, please see my question:
Why did Eaton and Kortum model perform so badly?
https://www.researchgate.net/post/Why_did_Eaton_and_Kortum_model_perform_so_badly
It is astonishing that “EK approach has been increasingly employed in the trade literature” as Xin Zhao observes. As I have put it in my question,
- Eaton and Kortum (2002) estimated the cost of moving autarky as 0.2 % for Japan (mobile labor case). Can anybody believe that the loss is so small when energy inputs are banned from importing? Japanese economy would surely go back at best to the level of the late Meiji period Japan (around 1900).
We have to ask why their estimate is so bad and why this poor performance comes from.
See aslo my another question:
Would someone like to compare two Ricardian systems?
https://www.researchgate.net/post/Would_someone_like_to_compare_two_Ricardian_systems2?
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