No. of Recommendations: 2
Brendan Duke @Brendan_Duke
Incredible stuff--they wanted to make the thing seem more sophisticated than it is so they threw in two Greek letters but selected values that cancel out so it's still just trade deficit divided by imports.
SNIP
Δτι = Xi-mi
........----------
.........ε*φ* mi
........(4*1/4*mi)
Parameter Selection
To calculate reciprocal tariffs, import and export data from the U.S. Census Bureau for 2024. Parameter values for ε and φ were selected. The price elasticity of import demand, &, was set at 4.
Recent evidence suggests the elasticity is near 2 in the long run (Boehm et al., 2023), but estimates of the elasticity vary. To be conservative, studies that find higher elasticities near 3-4 (e.g., Broda and Weinstein 2006; Simonovska and Waugh 2014; Soderbery 2018) were drawn on. The elasticity of import prices with respect to tariffs, φ, is 0.25. The recent experience with U.S. tariffs on China has demonstrated that tariff pass through to retail prices was low (Cavallo et al, 2021).
