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Gravity with Gravitas: A Solution to the Border Puzzle

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  • James E. Anderson
  • Eric van Wincoop

Abstract

Gravity equations have been widely used to infer trade flow effects of various institutional arrangements. We show that estimated gravity equations do not have a theoretical foundation. This implies both that estimation suffers from omitted variables bias and that comparative statics analysis is unfounded. We develop a method that (i) consistently and efficiently estimates a theoretical gravity equation and (ii) correctly calculates the comparative statics of trade frictions. We apply the method to solve the famous McCallum border puzzle. Applying our method, we find that national borders reduce trade between industrialized countries by moderate amounts of 20-50 percent.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/000282803321455214
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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 93 (2003)
Issue (Month): 1 (March)
Pages: 170-192

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Handle: RePEc:aea:aecrev:v:93:y:2003:i:1:p:170-192

Note: DOI: 10.1257/000282803321455214
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References

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  1. Deardorff, A.V., 1995. "Determinants of Bilateral Trade : Does Gravity Work in a Neoclassical World?," Papers 95-05, Michigan - Center for Research on Economic & Social Theory.
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  17. John F. Helliwell & Geneviève Verdier, 2001. "Measuring internal trade distances: a new method applied to estimate provincial border effects in Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 34(4), pages 1024-1041, November.
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  1. "Globalisation and the Costs of International Trade from 1870 to the Present"
    by Mark Thoma in Economist's View on 2008-08-16 20:08:00
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