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The Incidence of Gravity

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  • James E. Anderson

    ()
    (Boston College)

Abstract

The high trade costs inferred from gravity are rarely used in the wide class of trade models. Two related problems explain this omission of a key explanatory variable. First, national seller and buyer responses to trade costs depend on their incidence rather than on the full cost. Second, the high dimensionality of bilateral trade costs requires aggregation for most practical uses in interpretation or standard trade modeling. This paper provides an intuitive description of a resolution to the aggregation and incidence problems. For each product, it is as if each province or country sells to a world market containing all buyers and buys from from that market containing all sellers, the incidence of aggregated bilateral trade costs being divided between sellers and buyers according to their location. Measures of incidence described here give intuitive insight into the consequences of geography, illustrated with results from Anderson and Yotov (2008). The integration of the incidence measures with standard general equilibrium structure opens the way to richer applied general equilibrium models and better empirical work on the origins of comparative advantage.

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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 732.

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Date of creation: 10 Jan 2010
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Publication status: forthcoming in The Gravity Model in International Trade: Advances and Applications, Steven Brakman and Peter Bergeijk, eds.
Handle: RePEc:boc:bocoec:732

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Cited by:
  1. Jacob Bikker, 2009. "An extended gravity model with substitution applied to international trade," DNB Working Papers 215, Netherlands Central Bank, Research Department.
  2. Prehn, Sören & Brümmer, Bernhard & Thompson, Stanley R., 2010. "Payment decoupling and the intra-European calf trade," DARE Discussion Papers 1008, Georg-August University of Göttingen, Department of Agricultural Economics and Rural Development (DARE).
  3. Egger, Peter & Pfaffermayr, Michael, 2011. "Structural Estimation of Gravity Models with Path-dependent Market Entry," CEPR Discussion Papers 8458, C.E.P.R. Discussion Papers.

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