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Comparative Advantage and Biased Gravity

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  • Scott French

    (School of Economics, UNSW Business School, UNSW)

Abstract

Gravity estimation based on sector-level trade data is generally misspecified because it ignores the role of product-level comparative advantage in shaping the effects of trade barriers on sector-level trade flows. Using a model that allows for arbitrary patterns of product-level comparative advantage, I show that sector-level trade flows follow a generalized gravity equation that contains an unobservable, bilateral component that is correlated with trade costs and omitted by standard sector-level gravity models. I propose and implement an estimator that uses product-level data to account for patterns of comparative advantage and find the bias in sector-level estimates to be significant. I also find that, when controlling for product-level comparative advantage, estimates are much more robust to distributional assumptions, suggesting that remaining biases due to heteroskedasticity and sample selection are less severe than previously thought.

Suggested Citation

  • Scott French, 2017. "Comparative Advantage and Biased Gravity," Discussion Papers 2017-03, School of Economics, The University of New South Wales.
    • Handle: RePEc:swe:wpaper:2017-03
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    File URL: http://research.economics.unsw.edu.au/RePEc/papers/2017-03.pdf
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    References listed on IDEAS

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    Cited by:

    1. French, Scott, 2016. "The composition of trade flows and the aggregate effects of trade barriers," Journal of International Economics, Elsevier, vol. 98(C), pages 114-137.
    2. Lacaze, María Victoria & Melo Contreras, Oscar, 2017. "Diferenciación por calidad en el comercio global de alimentos pesqueros: un modelo gravitacional a nivel de producto," Nülan. Deposited Documents 2803, Universidad Nacional de Mar del Plata, Facultad de Ciencias Económicas y Sociales, Centro de Documentación.
    3. Flach, Lisandra & Unger, Florian, 2022. "Quality and gravity in international trade," Journal of International Economics, Elsevier, vol. 137(C).
    4. Tomoya Mori & Jens Wrona, 2018. "Inter-city Trade," KIER Working Papers 995, Kyoto University, Institute of Economic Research.
    5. Tomoya Mori & Jens Wrona, 2021. "Centrality Bias in Inter-city Trade," KIER Working Papers 1056, Kyoto University, Institute of Economic Research.
    6. Scott French, 2017. "A Gravity-Based Revealed Comparative Advantage Estimator," Discussion Papers 2017-05, School of Economics, The University of New South Wales.

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    More about this item

    Keywords

    international trade; product-level; misspecification; heteroskedasticity; multi-sector;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General

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