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Re-visiting the Distance Coefficient in Gravity Model

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  • Haonan Wu

Abstract

This paper revisits the classic gravity model in international trade and reexamines the distance coefficient. As pointed out by Frankel (1997), this coefficient measures the relative unit transportation cost between short distance and long distance rather than the absolute level of average transportation cost. Our results confirm this point in the sense that the coefficient has been very stable between 1991-2006, despite the obvious technological progress taken place during this period. Moreover, by comparing the sensitivity of these coefficients to change in oil prices at short periods of time, in which technology remained unchanged, we conclude that the average technology has indeed reduced the average trading cost. The results are robust when we divide the aggregate international trades into different industries.

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  • Haonan Wu, 2015. "Re-visiting the Distance Coefficient in Gravity Model," Papers 1503.05283, arXiv.org, revised Mar 2015.
    • Handle: RePEc:arx:papers:1503.05283
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    1. Maurice Obstfeld & Kenneth Rogoff, 2001. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," NBER Chapters, in: NBER Macroeconomics Annual 2000, Volume 15, pages 339-412, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Lord, Montague & Chang, Susan, 2019. "Pre-Feasibility Study of Sarawak-West Kalimantan Cross-Border Value Chains," MPRA Paper 94732, University Library of Munich, Germany.

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