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Yadulla Hasanli, Gunay Rahimli, Fuad Quliyev, Mattia Ferrari: Evaluation of Sectoral
Foreign Trade Elasticities of Azerbaijan

in a sector blur the distinction between domestic and imported products. Another
factor influencing the elasticity of substitution is the presence of entry barriers in the
sector, which reduces the substitutability between domestic and imported products.
Olekseyuk, Z. and Schürenberg-Frosch, H. (2016) emphasize the importance of
Armington elasticities in general equilibrium models and the sensitivity of model
results to the choice of elasticity. They note that using elasticities from other countries
when constructing general equilibrium models may lead to inaccurate results.
Accordingly, it is recommended to estimate these elasticities for each country and
sector whenever possible; if this is not feasible, multiple assessments using different
elasticity values should be conducted. Furthermore, by employing cointegration and
panel fixed-effects analyses, the study evaluates the first-order condition for various
European countries and demonstrates that the results differ across countries. Although
most evaluations in the literature employ econometric methods, such approaches
require a sufficient number of observations, which may not be feasible in developing
countries to obtain statistically significant results. In this context, Arndt, C.; Robinson,
S. and Tarp, F. (2002) developed the maximum entropy method and estimated
Armington and CET elasticities for the Mozambican economy using this approach.
Armington elasticities ranged from 0.57 to 5.54 across different sectors, while CET
elasticities ranged from 0.33 to 2.84. Ahmad, S.; Montgomery, C. and Schreiber, S.
(2021) highlight sectoral differences as a source of variation in existing studies, noting
that different levels of aggregation yield different results. Consequently, estimates for
more disaggregated sectors were higher than those for aggregated sectors in most
studies.

A recent World Bank study (Devarajan, S.; Go, D.; Robinson, S. (2023)) highlights
the scarcity of elasticity estimates in the literature, particularly for developing
countries. Using a vector error correction model, the study estimates Armington and
CET elasticities for 191 countries. On average, both Armington and CET elasticities
are 1.4 for developed countries, while Armington elasticities are 0.7 and CET
elasticities are 0.6 for developing countries. The study notes that, generally, the lower
elasticities in developing countries reflect their limited ability to respond adequately
to various price changes. For Azerbaijan, the estimated aggregate elasticities are 0.503
for imports and 0.362 for exports. This represents the only evaluation of the
Azerbaijani economy identified in the literature review, and sectoral-level elasticities
have not yet been estimated for the country.

Ahmad, S.; Montgomery, C.; Schreiber, S. (2021) review existing studies, summarize
the methods used to estimate Armington elasticities, and compare the results obtained.
The study considers the mathematical and methodological foundations of the import

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