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The "distance-varying" gravity model in international economics: is the distance an obstacle to trade?

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  • Vêlayoudom Marimoutou

    ()
    (Université de la Méditerranée and GREQAM)

  • Denis Peguin

    ()
    (Université de Provence and GREQAM)

  • Anne Peguin-Feissolle

    ()
    (CNRS and GREQAM)

Abstract

In this paper, we address the problem of the role of the distance between trading partners by assuming the variability of coefficients in a standard gravity model. The distance can be interpreted as an indicator of the cost of entry in a market (a fixed cost): the greater the distance, the higher the entry cost, and the more we need to have a large market to be able to cover a high cost of entry. To explore this idea, the paper uses a method called Flexible Least Squares. By allowing the parameters of the gravity model to vary over the observations, our main result is that the more the partner's GDP is large, the less the distance is an obstacle to trade.

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Bibliographic Info

Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 29 (2009)
Issue (Month): 2 ()
Pages: 1139-1155

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Handle: RePEc:ebl:ecbull:eb-09-00017

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Keywords: Gravity Equation; Flexible Least Squares; Geographical Distance;

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  1. Howard J. Wall, 1999. "Using the gravity model to estimate the costs of protection," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 33-40.
  2. Tesfatsion, Leigh S. & Veitch, J., 1990. "U.S. Money Demand Instability: A Flexible Least Squares Approach," Staff General Research Papers 11193, Iowa State University, Department of Economics.
  3. Robert Kalaba & Leigh Tesfatsion, 1995. "A Multicriteria Approach to Model Specification and Estimation," Econometrics, EconWPA 9501001, EconWPA.
  4. Baier, Scott L. & Bergstrand, Jeffrey H., 2009. "Bonus vetus OLS: A simple method for approximating international trade-cost effects using the gravity equation," Journal of International Economics, Elsevier, vol. 77(1), pages 77-85, February.
  5. Kalaba, Robert E. & Tesfatsion, Leigh S., 1990. "Flexible Least Squares for Approximately Linear Systems," Staff General Research Papers 11190, Iowa State University, Department of Economics.
  6. James E. Anderson, 2011. "The Gravity Model," Annual Review of Economics, Annual Reviews, Annual Reviews, vol. 3(1), pages 133-160, 09.
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  8. Simon J. Evenett & Wolfgang Keller, 1996. "On Theories Explaining the Success of the Gravity Equation," International Trade, EconWPA 9608001, EconWPA, revised 13 Jun 1997.
  9. Lutkepohl, Helmut & Herwartz, Helmut, 1996. "Specification of varying coefficient time series models via generalized flexible least squares," Journal of Econometrics, Elsevier, Elsevier, vol. 70(1), pages 261-290, January.
  10. Dorfman, Jeffrey H. & Foster, Kenneth A., 1991. "Estimating Productivity Changes With Flexible Coeficients," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 16(02), December.
  11. Feenstra, Robert & Markusen, James R. & Rose, Andrew K, 1998. "Understanding the Home Market Effect and the Gravity Equation: The Role of Differentiating Goods," CEPR Discussion Papers 2035, C.E.P.R. Discussion Papers.
  12. Leamer, Edward E., 1993. "U.S. manufacturing and an emerging Mexico," The North American Journal of Economics and Finance, Elsevier, vol. 4(1), pages 51-89.
  13. Chauveau, T. & Maillet, B., 1998. "Flexible Least Squares Betas: The French Market Case," Papers, Caisse des Depots et Consignations - Cahiers de recherche 1998-03/fi, Caisse des Depots et Consignations - Cahiers de recherche.
  14. Ploberger, Werner & Kramer, Walter & Kontrus, Karl, 1989. "A new test for structural stability in the linear regression model," Journal of Econometrics, Elsevier, Elsevier, vol. 40(2), pages 307-318, February.
  15. Markusen, James R, 1986. "Explaining the Volume of Trade: An Eclectic Approach," American Economic Review, American Economic Association, vol. 76(5), pages 1002-11, December.
  16. Bergstrand, Jeffrey H, 1985. "The Gravity Equation in International Trade: Some Microeconomic Foundations and Empirical Evidence," The Review of Economics and Statistics, MIT Press, vol. 67(3), pages 474-81, August.
  17. Helpman, Elhanan, 1987. "Imperfect competition and international trade: Evidence from fourteen industrial countries," Journal of the Japanese and International Economies, Elsevier, vol. 1(1), pages 62-81, March.
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