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North, South and Distance in the Gravity Model

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  • Jacques Melitz

    (Crest)

Abstract

It is generally assumed that distance in the gravity model strictly reflects frictions impedingbilateral trade. However, distances North-South could also reflect differences in factorendowment that provide opportunities for profitable trade. This paper investigates the hypothesisthat if we control for distance in the ordinary sense, differences North-South promoteinternational trade. The hypothesis receives ample support. Moreover, the significance of differencesNorth-South survives a battery of robustness tests, concerning period, distinctionsbetween differences in latitude North-North, North-South and South-South, and controls forother measures of differences in factor endowment, such as differences in per capita outputand differences in average temperature, rainfall, and seasonal range in temperature. The impactof differences North-South on bilateral trade has also been falling. This decline, in turn,might be partly responsible for the weakening of the influence of distance that has been occurringsince World War II. This last hypothesis receives confirmation as well. Finally, thepaper studies two country-specific aspects of distance: internal distance and remoteness. Itdoes so by examining the impact of both on the country fixed effects themselves: that is, thosethat emerged earlier. Internal distance turns out to have a far greater impact than remoteness –by an order of ten.

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Paper provided by Centre de Recherche en Economie et Statistique in its series Working Papers with number 2005-11.

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Length: 30
Date of creation: 2005
Date of revision:
Handle: RePEc:crs:wpaper:2005-11

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  1. Alan V. Deardorff, 1995. "Determinants of Bilateral Trade: Does Gravity Work in a Neoclassical World?," NBER Working Papers 5377, National Bureau of Economic Research, Inc.
  2. 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.
  3. Mélitz, Jacques, 2002. "Language and Foreign Trade," CEPR Discussion Papers 3590, C.E.P.R. Discussion Papers.
  4. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," NBER Working Papers 10480, National Bureau of Economic Research, Inc.
  5. Jeffrey A. Frankel, 1997. "Regional Trading Blocs in the World Economic System," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 72.
  6. Simon J. Evenett & Wolfgang Keller, 2002. "On Theories Explaining the Success of the Gravity Equation," Journal of Political Economy, University of Chicago Press, vol. 110(2), pages 281-316, April.
  7. Céline CARRERE & Maurice SCHIFF, 2004. "On the Geography of Trade: Distance is Alive and Well," Working Papers 200423, CERDI.
  8. 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.
  9. Anne-Celia Disdier & Keith Head, 2008. "The puzzling persistence of the distance effect on bilateral trade," Working Papers 21709, Institut National de la Recherche Agronomique, France.
  10. Hummels, David, 1999. "Toward a Geography of Trade Costs," GTAP Working Papers 1162, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University.
  11. Volker Nitsch, 2000. "National borders and international trade: evidence from the European Union," Canadian Journal of Economics, Canadian Economics Association, vol. 33(4), pages 1091-1105, November.
  12. Rikhil Bhavnani & Natalia T. Tamirisa & Arvind Subramanian & David T. Coe, 2002. "The Missing Globalization Puzzle," IMF Working Papers 02/171, International Monetary Fund.
  13. David H. Romer & Jeffrey A. Frankel, 1999. "Does Trade Cause Growth?," American Economic Review, American Economic Association, vol. 89(3), pages 379-399, June.
  14. Berthelon, Matias & Freund, Caroline, 2004. "On the conservation of distance in international trade," Policy Research Working Paper Series 3293, The World Bank.
  15. Leamer, E. & Levingsohn, J., 1994. "International Trade Theory: The Evidence," Working Papers 368, Research Seminar in International Economics, University of Michigan.
  16. Holger C. Wolf, 2000. "Intranational Home Bias In Trade," The Review of Economics and Statistics, MIT Press, vol. 82(4), pages 555-563, November.
  17. Jonathan Eaton & Samuel Kortum, 2002. "Technology, Geography, and Trade," Econometrica, Econometric Society, vol. 70(5), pages 1741-1779, September.
  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.
  19. Bergstrand, Jeffrey H, 1989. "The Generalized Gravity Equation, Monopolistic Competition, and the Factor-Proportions Theory in International Trade," The Review of Economics and Statistics, MIT Press, vol. 71(1), pages 143-53, February.
  20. Holger C. Wolf, 1997. "Patterns of Intra- and Inter-State Trade," NBER Working Papers 5939, National Bureau of Economic Research, Inc.
  21. Thierry Mayer & Keith Head, 2002. "Illusory Border Effects: Distance Mismeasurement Inflates Estimates of Home Bias in Trade," Working Papers 2002-01, CEPII research center.
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