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Heterogeneity and the Distance Puzzle

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This paper shows that reduced heterogeneity of exporter-specific goods can provide a direct explanation of the distance puzzle. Using COMTRADE 4-digit bilateral trade data we find that the elasticity of trade to distance has increased by 8% from 1962 to 2009. Theoretical foundations of the gravity equation indicate that the distance coefficient is the product of the elasticity of trade costs to distance and a measure of heterogeneity, e.g. the substitution elasticity between exporter-specific goods in the Armington framework. This parameter has increased by 13% from 1962 to 2009. The evolution of the distance coefficient is thus compatible with a 4% reduction in the elasticity of trade costs to distance.

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Paper provided by Observatoire Francais des Conjonctures Economiques (OFCE) in its series Documents de Travail de l'OFCE with number 2012-17.

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Date of creation: May 2012
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Handle: RePEc:fce:doctra:1217

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Keywords: gravity equation; distance puzzle; trade elasticity; trade costs;

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Cited by:
  1. Lendle, Andreas & Olarreaga, Marcelo & Schropp, Simon & Vézina, Pierre-Louis, 2012. "There goes gravity: how eBay reduces trade costs," CEPR Discussion Papers 9094, C.E.P.R. Discussion Papers.

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