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Gravity Redux: Estimation of gravity-equation coefficients, elasticities of substitution, and general equilibrium comparative statics under asymmetric bilateral trade costs

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Author Info

  • Bergstrand, Jeffrey H.
  • Egger, Peter
  • Larch, Mario

Abstract

A large class of models with CES utility and iceberg trade costs are now known to generate isomorphic “gravity equations.” Economic interpretations of these gravity equations vary in terms of two basic elements: the exporter's “mass” variable and the elasticity of trade with respect to true ad valorem “trade costs.” In this paper, we offer three potential contributions. First, we formulate and estimate a structural gravity equation based on the standard Krugman model of monopolistic competition and increasing returns. In the context of this model, a key parameter, the elasticity of substitution in consumption (σ), can be estimated precisely – even without observable true ad valorem trade-cost measures – using exporter's population and observable variables that influence trade costs. Second, in the empirical context of the well-known McCallum Canadian–U.S. “border puzzle,” our approach – allowing estimation of σ – yields considerably different general equilibrium comparative static trade-flow and economic welfare effects than those in an Armington endowment economy and assumed values of σ. Moreover, our predicted trade flows and GDPs are highly correlated with their respective observed values in the case of bilaterally symmetric or asymmetric Canadian–U.S. border effects. Third, a Monte Carlo analysis confirms unbiased and precise estimates of all coefficients, the elasticity of substitution, and comparative statics using our approach.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 89 (2013)
Issue (Month): 1 ()
Pages: 110-121

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Handle: RePEc:eee:inecon:v:89:y:2013:i:1:p:110-121

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Web page: http://www.elsevier.com/locate/inca/505552

Related research

Keywords: International trade; Gravity equation; Trade costs; Structural estimation;

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References

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  1. Elhanan Helpman & Marc Melitz & Yona Rubinstein, 2007. "Estimating Trade Flows: Trading Partners and Trading Volumes," NBER Working Papers 12927, National Bureau of Economic Research, Inc.
  2. The University of Iowa & Michael Waugh, 2008. "Bilateral Trade, Relative Prices, and Trade Costs," 2008 Meeting Papers 781, Society for Economic Dynamics.
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  5. Raymond Fisman & Shang-Jin Wei, 2004. "Tax Rates and Tax Evasion: Evidence from "Missing Imports" in China," Journal of Political Economy, University of Chicago Press, vol. 112(2), pages 471-500, April.
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  7. Robert Dekle & Jonathan Eaton & Samuel Kortum, 2007. "Unbalanced Trade," NBER Working Papers 13035, National Bureau of Economic Research, Inc.
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  9. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," NBER Working Papers 10480, National Bureau of Economic Research, Inc.
  10. Andrew B. Bernard & J. Bradford Jensen & Stephen J. Redding & Peter K. Schott, 2009. "The Margins of U.S. Trade (Long Version)," NBER Working Papers 14662, National Bureau of Economic Research, Inc.
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  13. Javorcik, Beata S. & Narciso, Gaia, 2007. "Differentiated products and evasion of import tariffs," Policy Research Working Paper Series 4123, The World Bank.
  14. Redding, Stephen J & Venables, Anthony J., 2000. "Economic Geography and International Inequality," CEPR Discussion Papers 2568, C.E.P.R. Discussion Papers.
  15. 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.
  16. Balistreri, Edward J. & Hillberry, Russell H., 2007. "Structural estimation and the border puzzle," Journal of International Economics, Elsevier, vol. 72(2), pages 451-463, July.
  17. David Hummels & Volodymyr Lugovskyy, 2006. "Are Matched Partner Trade Statistics a Usable Measure of Transportation Costs?," Review of International Economics, Wiley Blackwell, vol. 14(1), pages 69-86, 02.
  18. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-59, December.
  19. Thomas Chaney, 2008. "Distorted Gravity: The Intensive and Extensive Margins of International Trade," American Economic Review, American Economic Association, vol. 98(4), pages 1707-21, September.
  20. 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.
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Citations

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Cited by:
  1. Jun Oshiro, 2011. "Tariff Policy and Transport Costs under Reciprocal Dumping," Discussion Papers in Economics and Business 11-17, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  2. Keith Head & Thierry Mayer, 2013. "Gravity Equations: Workhorse,Toolkit, and Cookbook," Working Papers 2013-27, CEPII research center.
  3. Benedikt Heid & Mario Larch, 2012. "International Trade and Unemployment: A Quantitative Framework," CESifo Working Paper Series 4013, CESifo Group Munich.
  4. Rahel Aichele, 2013. "Trade, Climate Policy and Carbon Leakage - Theory and Empirical Evidence," ifo Beiträge zur Wirtschaftsforschung, Ifo Institute for Economic Research at the University of Munich, number 49.
  5. Herwartz, Helmut & Weber, Henning, 2013. "The role of cross-sectional heterogeneity for magnitude and timing of the euro's trade effect," Journal of International Money and Finance, Elsevier, vol. 37(C), pages 48-74.
  6. Badi H. Baltagi & Peter Egger & Michael Pfaffermayr, 2014. "Panel Data Gravity Models of International Trade," CESifo Working Paper Series 4616, CESifo Group Munich.

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