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Aggregation and the Gravity Equation

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  • Stephen J. Redding
  • David E. Weinstein

Abstract

One of the most successful empirical relationships in international trade is the gravity equation. A key decision for researchers in estimating this relationship is the level of aggregation, since the gravity equation is log linear, whereas aggregation involves summing the level rather than the log of trade. In this paper, we derive a Jensen's inequality correction term for nested constant elasticity of substitution preferences, such that a log-linear gravity equation holds exactly for each nest. We provide evidence that sectoral composition is quantitatively relevant for the aggregate effect of distance on international trade, particularly for more disaggregated definitions of sectors.

Suggested Citation

  • Stephen J. Redding & David E. Weinstein, 2019. "Aggregation and the Gravity Equation," AEA Papers and Proceedings, American Economic Association, vol. 109, pages 450-455, May.
    • Handle: RePEc:aea:apandp:v:109:y:2019:p:450-55
    Note: DOI: 10.1257/pandp.20191006
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    Cited by:

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    2. Ingo Borchert & Mario Larch & Serge Shikher & Yoto V. Yotov, 2022. "Disaggregated gravity: Benchmark estimates and stylized facts from a new database," Review of International Economics, Wiley Blackwell, vol. 30(1), pages 113-136, February.
    3. Vandenbussche, Hylke & Aw-Roberts, Bee Yan & Lee, Yi, 2019. "The Importance of Consumer Taste in Trade," CEPR Discussion Papers 13614, C.E.P.R. Discussion Papers.
    4. Peter R. Herman, 2022. "A pragmatic approach to estimating nondiscriminatory non‐tariff trade costs," Review of International Economics, Wiley Blackwell, vol. 30(4), pages 1258-1287, September.
    5. Fontagné, Lionel & Guimbard, Houssein & Orefice, Gianluca, 2022. "Tariff-based product-level trade elasticities," Journal of International Economics, Elsevier, vol. 137(C).
    6. Lionel Fontagné & Houssein Guimbard & Gianluca Orefice, 2020. "Product-Level Trade Elasticities: Worth Weighting For," Working Papers DT/2020/08, DIAL (Développement, Institutions et Mondialisation).
    7. MORI Tomoya, 2021. "Regularity in Urban Agglomeration Patterns and Its Macroscopic Implications for Regional Policies (Japanese)," Policy Discussion Papers (Japanese) 21012, Research Institute of Economy, Trade and Industry (RIETI).
    8. Jareb, Colin & Nigai, Sergey, 2022. "Gravity models and the Law of Large Numbers," Economics Letters, Elsevier, vol. 221(C).
    9. Gabriel E. Kreindler & Yuhei Miyauchi, 2019. "Measuring Commuting and Economic Activity inside Cities with Cell Phone Records," Boston University - Department of Economics - Working Papers Series WP2020-006, Boston University - Department of Economics, revised Apr 2020.
    10. Zheng, Han, 2022. "Heterogeneous Internal Trade Cost and Its Implications in Trade," Discussion paper series HIAS-E-117, Hitotsubashi Institute for Advanced Study, Hitotsubashi University.

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    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

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