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

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  • Edward J. Balistreri
  • Russell H. 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. JEL classification: F10 Frictions commerciales et bien‐être dans un modèle gravitationnel: quelle portion du iceberg fond? Un élément clé qui manque dans la littérature spécialisée sur la gravité structurelle est l’examen de l’équilibre général implicite. Par construction, l’équation de gravité prédit bien les flux de commerce bilatéraux. Pour suggérer des inférences au‐delà des flux de commerce, il faut cependant que les modèles théoriques soient compatibles avec ce qu’on observe par ailleurs. Les calibrations économétriques structurelles d’Anderson et van Wincoop (2003) permettent d’évaluer leur équilibre général proposé selon plusieurs dimensions. Il s’avère que leur modèle de gravité prédit une différence trop grande entre les prix des producteurs et des consommateurs; une variation excessive dans la distribution géographique des indices de prix à la consommation; et une portion anormalement grande de la production dépensée pour surmonter les frictions commerciales. A partir de paramétrisations plausibles du modèle, on montre que 50% de la production « fond » en cours de route.

Suggested Citation

  • Edward J. Balistreri & Russell H. Hillberry, 2006. "Trade frictions and welfare in the gravity model: how much of the iceberg melts?," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 39(1), pages 247-265, February.
  • Handle: RePEc:wly:canjec:v:39:y:2006:i:1:p:247-265
    DOI: 10.1111/j.0008-4085.2006.00346.x
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    JEL classification:

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

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