Thomas Sampson
speaker
23 appearances
1 recordings
1 series
first heard Apr 2025
last heard Apr 2025
Thomas Sampson’s voice in public audio — every appearance, attributed to the second.
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The idea is that the epsilon tells you about how much, if you increase tariffs and therefore you increase the price of imports, how much trade responds.
And the phi is telling you, if you increase tariffs, how much of that is passed through into import prices.
So the combination of the epsilon and the phi tells you, if I increase tariffs, what is the proportional change in trade as a response?
So that, in fact, is a really important parameter for anyone who studies international trade.
It's what trade economists call the trade elasticity.
Exactly.
But there's a catch, which is that the values of the epsilon and phi they've chosen to use actually multiply together to just give one.
And so because epsilon times phi is one, it just drops out of the equation and actually makes no difference to the tariff calculations.
So the actual calculations they do are as if the epsilon and the phi aren't there.
So they could play an interesting role, but in practice they don't because they've used values that make them drop out.
It just happens to be that the values that they've chosen happen to equal 1.
And in fact, we know something about what those numbers should be.
And typically, we would think that they should be a number bigger than 1 once you multiply them together, maybe somewhere between 2 at a minimum, maybe closer to 5 on average.
So they've, in fact, chosen a very low value for that epsilon phi combination.
Absolutely, it does.
For example, if the epsilon times five are equal to five instead of one, the tariff would be one fifth as big.
It will certainly have an effect on trade.
And for some countries, it might reduce the trade deficits.
But the other thing we need to bear in mind is that what drives the aggregate US trade deficit is not anything to do with US tariff policy.
It's the fact that the US invests more than it saves domestically.
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