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Trade frictions and welfare in the gravity model: how much of the iceberg melts?

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  • Edward Balistreri
  • Russell Hillberry

Abstract

A key element missing from the structural gravity literature is an examination of the implied general equilibrium. By design the gravity equation is adept at predicting bilateral trade flows. To make inferences beyond trade flows, however, the theoretic models should be consistent with other observables. Structural econometric estimates from Anderson and van Wincoop (2003) allow us to evaluate their proposed general equilibrium along several dimensions. We find that their gravity model predicts too large a difference between consumer and producer prices; excessive variation in the geographic distribution of consumer price indices; and an exceptionally large portion of output devoted to overcoming trade frictions. Under plausible parameterizations of the model at least 50% of output `melts' in transit.

Suggested Citation

  • Edward Balistreri & Russell Hillberry, 2006. "Trade frictions and welfare in the gravity model: how much of the iceberg melts?," Canadian Journal of Economics, Canadian Economics Association, vol. 39(1), pages 247-265, February.
  • Handle: RePEc:cje:issued:v:39:y:2006:i:1:p:247-265
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    References listed on IDEAS

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    Cited by:

    1. Asier Minondo, 2007. "The disappearance of the border barrier in some European Union countries' bilateral trade," Applied Economics, Taylor & Francis Journals, vol. 39(1), pages 119-124.
    2. Fukao, Kyoji & Okubo, Toshihiro, 2011. "Why Has the Border Effect in the Japanese Machinery Sectors Declined?: The Role of Business Networks in East Asian Machinery Trade," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 26, pages 651-671.
    3. Chahir Zaki, 2008. "Does Trade Facilitation Matter in Bilateral Trade ?," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00348924, HAL.
    4. Femenia, Fabienne & Gohin, Alexandre, 2007. "Estimating price elasticities of food trade functions: How relevant is the gravity approach?," Working Papers 7211, TRADEAG - Agricultural Trade Agreements.
    5. John S. Wilson & Catherine L. Mann & Tsunehiro Otsuki, 2005. "Assessing The Potential Benefit Of Trade Facilitation: A Global Perspective," World Scientific Book Chapters,in: Quantitative Methods For Assessing The Effects Of Non-Tariff Measures And Trade Facilitation, chapter 8, pages 121-160 World Scientific Publishing Co. Pte. Ltd..
    6. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," Journal of Economic Literature, American Economic Association, pages 691-751.
    7. Balistreri, Edward J. & Hillberry, Russell H., 2007. "Structural estimation and the border puzzle," Journal of International Economics, Elsevier, vol. 72(2), pages 451-463, July.
    8. The University of Iowa & Michael Waugh, 2008. "Bilateral Trade, Relative Prices, and Trade Costs," 2008 Meeting Papers 781, Society for Economic Dynamics.
    9. Anderson, Michael A. & Smith, Stephen L.S., 2007. "How does history matter? Hysteresis in Canadian trade," The North American Journal of Economics and Finance, Elsevier, vol. 18(3), pages 279-291, December.
    10. Dinda, Soumyananda, 2013. "Climate Change Creates Trade Opportunity in India," MPRA Paper 50636, University Library of Munich, Germany, revised 14 Oct 2013.
    11. Gutiérrez, Gabriel, 2005. "Ex-post evaluation of the employment effects of a preferential trade agreement: methodological issues, illustrated with a reference to Chile," Comercio Internacional 57, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    12. Cortes, Maria, 2007. "Composition of Trade between Australia and Latin America: Gravity Model," Economics Working Papers wp07-19, School of Economics, University of Wollongong, NSW, Australia.
    13. Wilson,John S. & Mann, Catherine L. & Otsuki, Tsunehiro, 2003. "Trade facilitation and economic development : measuring the impact," Policy Research Working Paper Series 2988, The World Bank.
    14. Fink, Carsten & Mattoo, Aaditya & Neagu, Ileana Cristina, 2005. "Assessing the impact of communication costs on international trade," Journal of International Economics, Elsevier, vol. 67(2), pages 428-445, December.
    15. Soloaga, Isidro & Wilson, John S. & Mejia, Alejandro, 2006. "Moving forward faster : trade facilitation reform and Mexican competitiveness," Policy Research Working Paper Series 3953, The World Bank.
    16. Alexandre Gohin & Fabienne Féménia, 2009. "Estimating Price Elasticities of Food Trade Functions: How Relevant is the CES-based Gravity Approach?," Journal of Agricultural Economics, Wiley Blackwell, vol. 60(2), pages 253-272.
    17. Michael E. Waugh, 2010. "International Trade and Income Differences," American Economic Review, American Economic Association, vol. 100(5), pages 2093-2124, December.
    18. Edward J. Balistreri & Russell H. Hillberry, 2008. "The Gravity Model: An Illustration Of Structural Estimation As Calibration," Economic Inquiry, Western Economic Association International, vol. 46(4), pages 511-527, October.
    19. Maryanchyk Ivan, 2005. "Ukrainian international trade: How far from the potential?," EERC Working Paper Series 05-14e, EERC Research Network, Russia and CIS.
    20. Shawn Tan, 2012. "Structural Estimation of a Flexible Translog Gravity Model," Department of Economics - Working Papers Series 1164, The University of Melbourne.
    21. repec:hal:journl:halshs-00348924 is not listed on IDEAS
    22. repec:afe:journl:v:19:y:2017:i:1:p:1-26 is not listed on IDEAS
    23. Fensore, Irene & Legge, Stefan & Schmid, Lukas, 2017. "Human Barriers to International Trade," Economics Working Paper Series 1712, University of St. Gallen, School of Economics and Political Science.
    24. Hou, Yulin & Wang, Yun & Yilmazkuday, Hakan, 2017. "Gravity Channels in Trade," Globalization and Monetary Policy Institute Working Paper 297, Federal Reserve Bank of Dallas.

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    JEL classification:

    • F10 - International Economics - - Trade - - - General

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