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Gravity with Gravitas: A Solution to the Border Puzzle

Author

Listed:
  • James E. Anderson

    (Boston College)

  • Eric van Wincoop

    (Federal Reserve Bank of New York)

Abstract

The gravity model has been widely used to infer substantial trade flow effects of institutions such as customs unions and exchange rate mechanisms. McCallum [1995] found that the US-Canada border led to trade between provinces that was a factor 22 (2,200%) times trade between states and provinces, a spectacular puzzle in light of the low formal barriers on this border. We show that the gravity model usually estimated does not correspond to the theory behind it. We solve the "border puzzle" by applying the theory seriously. We find that national borders reduce trade between the US and Canada by about 40%, while reducing trade among other industrialized countries by about 30%. The spectacular McCallum headline number is the result of a combination of omitted variables bias and the small size of the Canadian economy.

Suggested Citation

  • James E. Anderson & Eric van Wincoop, 2000. "Gravity with Gravitas: A Solution to the Border Puzzle," Boston College Working Papers in Economics 485, Boston College Department of Economics.
  • Handle: RePEc:boc:bocoec:485
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    References listed on IDEAS

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    Keywords

    gravity; bordered effects;

    JEL classification:

    • F1 - International Economics - - Trade

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