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Gravity with Gravitas: A Solution to the Border Puzzle

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Author Info

  • James E. Anderson

    () (Boston College)

  • Eric van Wincoop

    (Federal Reserve Bank of New York)

Abstract

The gravity model has been widely used to infer substantial trade flow effects of institutions such as customs unions and exchange rate mechanisms. McCallum [1995] found that the US-Canada border led to trade between provinces that was a factor 22 (2,200%) times trade between states and provinces, a spectacular puzzle in light of the low formal barriers on this border. We show that the gravity model usually estimated does not correspond to the theory behind it. We solve the "border puzzle" by applying the theory seriously. We find that national borders reduce trade between the US and Canada by about 40%, while reducing trade among other industrialized countries by about 30%. The spectacular McCallum headline number is the result of a combination of omitted variables bias and the small size of the Canadian economy.

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Bibliographic Info

Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 485.

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Length: 37 pages
Date of creation: 15 Nov 2000
Date of revision:
Publication status: published, American Economic Review, 2003, 93, 170-92
Handle: RePEc:boc:bocoec:485

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Keywords: gravity; bordered effects;

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References

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  1. Maurice Obstfeld & Kenneth Rogoff, 2000. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," NBER Working Papers 7777, National Bureau of Economic Research, Inc.
  2. Barry Eichengreen & Douglas A. Irwin, 1998. "The Role of History in Bilateral Trade Flows," NBER Chapters, in: The Regionalization of the World Economy, pages 33-62 National Bureau of Economic Research, Inc.
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  8. Jeffrey A. Frankel and Shang-Jin Wei., 1996. "ASEAN in a Regional Perspective," Center for International and Development Economics Research (CIDER) Working Papers C96-074, University of California at Berkeley.
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  22. Brenton, Paul & DiMauro, Francesca & Lücke, Matthias, 1998. "Economic integration and FDI: an empirical analysis of foreign investment in the EU and in Central and Eastern Europe," Kiel Working Papers 890, Kiel Institute for the World Economy.
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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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