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Trade frictions and welfare in the gravity model: how much of the iceberg melts?

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Author Info
Edward Balistreri
Russell Hillberry

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Abstract

A key element missing from the structural gravity literature is an examination of the implied general equilibrium. By design the gravity equation is adept at predicting bilateral trade flows. To make inferences beyond trade flows, however, the theoretic models should be consistent with other observables. Structural econometric estimates from Anderson and van Wincoop (2003) allow us to evaluate their proposed general equilibrium along several dimensions. We find that their gravity model predicts too large a difference between consumer and producer prices; excessive variation in the geographic distribution of consumer price indices; and an exceptionally large portion of output devoted to overcoming trade frictions. Under plausible parameterizations of the model at least 50% of output `melts' in transit.

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Publisher Info
Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 39 (2006)
Issue (Month): 1 (February)
Pages: 247-265
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Handle: RePEc:cje:issued:v:39:y:2006:i:1:p:247-265

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F10 - International Economics - - Trade - - - General

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  1. Wilson,John S. & Mann, Catherine L. & Otsuki, Tsunehiro, 2003. "Trade facilitation and economic development : measuring the impact," Policy Research Working Paper Series 2988, The World Bank. [Downloadable!]
  2. Fink, Carsten & Mattoo, Aaditya & Neagu, Ileana Cristina, 2002. "Assessing the impact of communication costs on international trade," Policy Research Working Paper Series 2929, The World Bank. [Downloadable!]
    Other versions:
  3. Soloaga, Isidro & Wilson, John S. & Mejia, Alejandro, 2006. "Moving forward faster : trade facilitation reform and Mexican competitiveness," Policy Research Working Paper Series 3953, The World Bank. [Downloadable!]
  4. Femenia, Fabienne & Gohin, Alexandre, 2007. "Estimating price elasticities of food trade functions: How relevant is the gravity approach?," Working Papers 7211, TRADEAG - Agricultural Trade Agreements. [Downloadable!]
  5. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," NBER Working Papers 10480, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Wilson, John S. & Mann, Catherine L. & Otsuki, Tsunehiro, 2004. "Assessing the potential benefit of trade facilitation : A global perspective," Policy Research Working Paper Series 3224, The World Bank. [Downloadable!]
  7. Asier Minondo, 2007. "The disappearance of the border barrier in some European Union countries’ bilateral trade," Applied Economics, Taylor and Francis Journals, vol. 39(1), pages 119-124, January. [Downloadable!] (restricted)
  8. Maryanchyk Ivan, 2005. "Ukrainian international trade: How far from the potential?," EERC Working Paper Series 05-14e, EERC Research Network, Russia and CIS. [Downloadable!]
  9. Cortes, Maria, 2007. "Composition of Trade between Australia and Latin America: Gravity Model," Economics Working Papers wp07-19, School of Economics, University of Wollongong, NSW, Australia. [Downloadable!]
  10. Kyoji Fukao & Toshihiro Okubo, 2008. "Why Has the Border Effect in the Japanese Machinery Sectors Declined? The Role of Business Networks in East Asian-Machinery Trade," Hi-Stat Discussion Paper Series d07-238, Institute of Economic Research, Hitotsubashi University. [Downloadable!]
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