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The distance puzzle revisited: a new interpretation based on geographic neutrality

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  • Arribas, Iván
  • Pérez, Francisco
  • Tortosa-Ausina, Emili

Abstract

One of the most remarkable features of globalization is the boost undergone by international trade triggered off by advances in technology that have contributed to reduce the cost of trade (e.g., transportation and communication costs). Under these circumstances, the importance of distance should have diminished over time, which would constitute a boon for countries located far from the main centers of economic activity. However, one of the best-established empirical results in international economics is that bilateral trade decreases with distance. This apparent contradiction has been labeled as the “missing globalization puzzle”. We propose yet another explanation to this apparent contradiction based on the concept of geographic neutrality, which we use to construct international trade integration indicators for two different scenarios, namely, when distance matters and when it does not. Our results indicate that the importance of distance varies greatly across countries, as revealed by disparate gaps between distance-corrected and distance-uncorrected trade integration indicators for different countries. Some factors rooted in the literature explain away the discrepancies, but their importance varies according to the trade integration indicator considered —trade openness or trade connection.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 19170.

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Date of creation: 2009
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Handle: RePEc:pra:mprapa:19170

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Keywords: Geographic Neutrality; Globalization; Gravity Models; Network Analysis; Remoteness;

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  1. Arribas, Iván & Pérez, Francisco & Tortosa-Ausina, Emili, 2009. "Measuring Globalization of International Trade: Theory and Evidence," World Development, Elsevier, Elsevier, vol. 37(1), pages 127-145, January.
  2. Leamer, Edward E. & Levinsohn, James, 1995. "International trade theory: The evidence," Handbook of International Economics, Elsevier, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 26, pages 1339-1394 Elsevier.
  3. Alesina, Alberto & Spolaore, Enrico, 1997. "On the Number and Size of Nations," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 112(4), pages 1027-56, November.
  4. Natalie Chen & Jean Imbs & Andrew Scott, 2006. "The dynamics of trade and competition," Working Paper Research, National Bank of Belgium 91, National Bank of Belgium.
  5. Raja Kali & Javier Reyes, 2007. "The architecture of globalization: a network approach to international economic integration," Journal of International Business Studies, Palgrave Macmillan, vol. 38(4), pages 595-620, July.
  6. Thierry Mayer & Keith Head, 2002. "Illusory Border Effects: Distance Mismeasurement Inflates Estimates of Home Bias in Trade," Working Papers 2002-01, CEPII research center.
  7. Berthelon, Matias & Freund, Caroline, 2004. "On the conservation of distance in international trade," Policy Research Working Paper Series 3293, The World Bank.
  8. Jeffrey A. Frankel, 2000. "Globalization of the Economy," NBER Working Papers 7858, National Bureau of Economic Research, Inc.
  9. Andrew K. Rose, 2000. "One money, one market: the effect of common currencies on trade," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 15(30), pages 7-46, 04.
  10. Rikhil Bhavnani & Natalia T. Tamirisa & Arvind Subramanian & David T. Coe, 2002. "The Missing Globalization Puzzle," IMF Working Papers 02/171, International Monetary Fund.
  11. David T Coe & Arvind Subramanian & Natalia T Tamirisa, 2007. "The Missing Globalization Puzzle: Evidence of the Declining Importance of Distance," IMF Staff Papers, Palgrave Macmillan, vol. 54(1), pages 34-58, May.
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