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Applying the gravity approach to sector trade: who bears the trade costs?

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  • Angela Cheptea

    ()
    (SMART - Structures et Marché Agricoles, Ressources et Territoires - Agrocampus Ouest - Institut national de la recherche agronomique (INRA) : UMR1302)

  • Alexandre Gohin

    (SMART - Structures et Marché Agricoles, Ressources et Territoires - Agrocampus Ouest - Institut national de la recherche agronomique (INRA) : UMR1302)

  • Maryline Huchet-Bourdon

    (SMART - Structures et Marché Agricoles, Ressources et Territoires - Agrocampus Ouest - Institut national de la recherche agronomique (INRA) : UMR1302)

Abstract

Thanks to its empirical success, the gravity approach is widely used to explain trade patterns between countries. In this article we question the simple application of this approach to product/sector-level trade on two grounds. First, we demonstrate that the traditional Armington version of gravity must be altered to properly account for the fact that sector expenditures are not strictly equal to sector productions because some trade costs are incurred outside the sector of interest. Secondly, we show empirically that collecting/using good data on sector-level trade and expenditure is extremely crucial for the quality of econometric estimations. Above all one should strictly adhere to the requirements of the theoretical frameworks in order to obtain unbiased and accurate estimates of the different parameters.

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Paper provided by HAL in its series Post-Print with number hal-00729335.

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Date of creation: 2011
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Handle: RePEc:hal:journl:hal-00729335

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  1. Hummels, David & Levinsohn, James, 1995. "Monopolistic Competition and International Trade: Reconsidering the Evidence," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 110(3), pages 799-836, August.
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  11. Paul S. Armington, 1969. "A Theory of Demand for Products Distinguished by Place of Production (Une théorie de la demande de produits différenciés d'après leur origine) (Una teoría de la demanda de productos dis," IMF Staff Papers, Palgrave Macmillan, vol. 16(1), pages 159-178, March.
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  15. Bruno Henry de Frahan & Mark Vancauteren, 2006. "Harmonisation of food regulations and trade in the Single Market: evidence from disaggregated data," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 33(3), pages 337-360, September.
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  17. Jon Haveman & David Hummels, 2004. "Alternative hypotheses and the volume of trade: the gravity equation and the extent of specialization," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 37(1), pages 199-218, February.
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