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Non-tradable goods and the border effect puzzle

  • Liu, Xiaoyun
  • Whalley, John
  • Xin, Xian

The surprisingly high Canada-U.S. border effect estimated by McCallum has been puzzling trade economists in the last ten years. We argue in this paper that conventional estimates of the border effect without consideration of non-tradable goods can overstate the trade reducing effect of the national border and the impacts can be considerable. We then explore the Canada-U.S. case with a numerical general equilibrium model with parameters calibrated to 2001 data. Our counterfactual experiment results suggest that after adjusting for effects of non-tradable goods the Canada-U.S. border effect is reduced to 2.11.

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Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 27 (2010)
Issue (Month): 5 (September)
Pages: 909-914

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Handle: RePEc:eee:ecmode:v:27:y:2010:i:5:p:909-914
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30411

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  7. Hillberry, Russell & Hummels, David, 2008. "Trade responses to geographic frictions: A decomposition using micro-data," European Economic Review, Elsevier, vol. 52(3), pages 527-550, April.
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  13. John Whalley & Xian Xin, 2006. "Home and Regional Biases and Border Effects in Armington Type Models," NBER Working Papers 12439, National Bureau of Economic Research, Inc.
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  17. 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.
  18. Carolyn L. Evans, 2003. "The Economic Significance of National Border Effects," American Economic Review, American Economic Association, vol. 93(4), pages 1291-1312, September.
  19. Russell Hillberry & David Hummels, 2002. "Intra-national Home Bias: Some Explanations," NBER Working Papers 9022, National Bureau of Economic Research, Inc.
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