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The "distance-varying" gravity model in international economics: is the distance an obstacle to trade?

  • Vêlayoudom Marimoutou

    ()

    (Université de la Méditerranée and GREQAM)

  • Denis Peguin

    ()

    (Université de Provence and GREQAM)

  • Anne Peguin-Feissolle

    ()

    (CNRS and GREQAM)

In this paper, we address the problem of the role of the distance between trading partners by assuming the variability of coefficients in a standard gravity model. The distance can be interpreted as an indicator of the cost of entry in a market (a fixed cost): the greater the distance, the higher the entry cost, and the more we need to have a large market to be able to cover a high cost of entry. To explore this idea, the paper uses a method called Flexible Least Squares. By allowing the parameters of the gravity model to vary over the observations, our main result is that the more the partner's GDP is large, the less the distance is an obstacle to trade.

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Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 29 (2009)
Issue (Month): 2 ()
Pages: 1139-1155

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Handle: RePEc:ebl:ecbull:eb-09-00017
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  1. Tesfatsion, Leigh S. & Veitch, J., 1990. "U.S. Money Demand Instability: A Flexible Least Squares Approach," Staff General Research Papers 11193, Iowa State University, Department of Economics.
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  13. Robert C. Feenstra & James A. Markusen & Andrew K. Rose, 1998. "Undertstanding the Home Market Effect and the Gravity Equation: The Role of Differentiating Goods," NBER Working Papers 6804, National Bureau of Economic Research, Inc.
  14. Howard J. Wall, 1999. "Using the gravity model to estimate the costs of protection," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 33-40.
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  17. Jonathan Eaton & Samuel Kortum, 1997. "Technology and Bilateral Trade," Boston University - Institute for Economic Development 79, Boston University, Institute for Economic Development.
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