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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)

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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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Publisher 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
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Handle: RePEc:boc:bocoec:485

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Related research
Keywords: gravity; bordered effects;

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F1 - International Economics - - Trade

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  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. [Downloadable!] (restricted)
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  2. Russell Hillberry & David Hummels, 2002. "Explaining Home Bias in Consumption: The Role of Intermediate Input Trade," NBER Working Papers 9020, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Feenstra, Robert C, 1994. "New Product Varieties and the Measurement of International Prices," American Economic Review, American Economic Association, vol. 84(1), pages 157-77, March. [Downloadable!] (restricted)
  4. 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. [Downloadable!]
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  5. Andrew K. Rose, 2000. "One money, one market: the effect of common currencies on trade," Economic Policy, CEPR, CES, MSH, vol. 15(30), pages 7-46, 04. [Downloadable!] (restricted)
  6. Jeffrey A. Frankel & Ernesto Stein & Shang-Jin Wei, 1993. "Continental Trading Blocs: Are They Natural, or Super-Natural?," NBER Working Papers 4588, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Shang-Jin Wei, 1996. "Intra-National versus International Trade: How Stubborn are Nations in Global Integration?," NBER Working Papers 5531, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Andrew K. Rose & Eric van Wincoop, 2001. "National Money as a Barrier to International Trade: The Real Case for Currency Union," American Economic Review, American Economic Association, vol. 91(2), pages 386-390, May. [Downloadable!] (restricted)
  9. McCallum, John, 1995. "National Borders Matter: Canada-U.S. Regional Trade Patterns," American Economic Review, American Economic Association, vol. 85(3), pages 615-23, June. [Downloadable!] (restricted)
  10. Michael Anderson & Stephen Smith, 1999. "Canadian Provinces in World Trade: Engagement and Detachment," Canadian Journal of Economics, Canadian Economics Association, vol. 32(1), pages 22-38, February. [Downloadable!] (restricted)
  11. Andrew B. Bernard & Joachim Wagner, 1998. "Export Entry and Exit by German Firms," NBER Working Papers 6538, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. John F. Helliwell, 1996. "Do National Borders Matter for Quebec's Trade?," NBER Working Papers 5215, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  13. 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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  14. Chen, Natalie, 2002. "Intra-national versus International Trade in the European Union: Why do National Borders Matter?," CEPR Discussion Papers 3407, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  15. Trefler, Daniel, 1995. "The Case of the Missing Trade and Other Mysteries," American Economic Review, American Economic Association, vol. 85(5), pages 1029-46, December. [Downloadable!] (restricted)
  16. John F. Helliwell, 1996. "Do National Borders Matter for Quebec's Trade?," Canadian Journal of Economics, Canadian Economics Association, vol. 29(3), pages 507-22, August. [Downloadable!] (restricted)
  17. 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. [Downloadable!] (restricted)
  18. John F. Helliwell & Geneviève Verdier, 2001. "Measuring internal trade distances: a new method applied to estimate provincial border effects in Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 34(4), pages 1024-1041, November. [Downloadable!] (restricted)
  19. Portes, Richard & Rey, Helene, 1998. "The Euro and International Equity Flows," Journal of the Japanese and International Economies, Elsevier, vol. 12(4), pages 406-423, December. [Downloadable!] (restricted)
  20. Kei-Mu Yi, 2003. "Can Vertical Specialization Explain the Growth of World Trade?," Journal of Political Economy, University of Chicago Press, vol. 111(1), pages 52-102, February. [Downloadable!] (restricted)
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  21. Rose, Andrew K, 1999. "One Money, One Market: Estimating the Effect of Common Currencies on Trade," CEPR Discussion Papers 2329, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  22. Paul Brenton & Francesca Di Mauro & Matthias Lücke, 1999. "Economic Integration and FDI: An Empirical Analysis of Foreign Investment in the EU and in Central and Eastern Europe," Empirica, Springer, vol. 26(2), pages 95-121, June. [Downloadable!] (restricted)
  23. James E. Anderson & Douglas Marcouiller, 2002. "Insecurity And The Pattern Of Trade: An Empirical Investigation," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 342-352, May. [Downloadable!] (restricted)
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  24. Keith Head & John Ries, 2001. "Increasing Returns versus National Product Differentiation as an Explanation for the Pattern of U.S.-Canada Trade," American Economic Review, American Economic Association, vol. 91(4), pages 858-876, September. [Downloadable!] (restricted)
  25. Alan Deardorff, 1998. "Determinants of Bilateral Trade: Does Gravity Work in a Neoclassical World?," NBER Chapters, in: The Regionalization of the World Economy, pages 7-32 National Bureau of Economic Research, Inc. [Downloadable!]
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  26. Anderson, James E, 1979. "A Theoretical Foundation for the Gravity Equation," American Economic Review, American Economic Association, vol. 69(1), pages 106-16, March. [Downloadable!] (restricted)
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