Estimating Elasticities for Tradable Services in Policy Simulations

We provide new estimates of the Armington elasticities of substitution for several services sectors. Our approach relies on methods that utilize the theoretical relationship between the elasticity and profit margins in a monopolistic competition framework as described in Gervais and Jensen (2019) and Ahmad and Riker (2019). We find that the median elasticity of substitution is 5.65 at the NAICS 3-digit level and 5.42 at the more aggregated GTAP sector level. Finally, we illustrate the importance that these services trade elasticities can have on model outcomes in GTAP by simulating a hypothetical and stylized agreement that liberalizes services trade between the US and the UK.