Economics, trade: Theoretical tariffs, part 2: epsilon and phi

Self-tutoring about trade and economics: the tutor mentions some parameters from the apparent theoretical tariff calculation.

In yesterday’s post I mention a calculation apparently meant to model theoretical tariffs on US exports. As I understand, said formula, which looks somewhat like t=(x-m)/(εφm), has t as the theoretical tariff, x as US exports to that country, and m as US imports from that same country. Then, there are epsilon, which is ε, and phi, φ.

As I understand, ε is meant to be the elasticity of demand with respect to price (see my post here), while φ is meant to be the passthrough. The passthrough seems to be the factor by which a tariff increases the price; for example, passthrough of 0.5 might suggest that for every dollar amount of tariff, the consumer sees a price increase of fifty cents.

Interestingly, it seems ε is set to -4, for now, while φ is set to 0.25. Therefore, their product is -1. In that case, the formula becomes x=(x-m)/(-m).

There is likely more to say about this intriguing formula and its assumptions. I hope to follow up:)

Source:

ustr.gov

bankofcanada.ca

science.co.il