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Gravity with Gravitas: A Solution to the Border Puzzle

  • James E. Anderson

    ()

    (Boston College)

  • Eric van Wincoop

    (Federal Reserve Bank of New York)

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.

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Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 485.

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Length: 37 pages
Date of creation: 15 Nov 2000
Date of revision:
Publication status: published, American Economic Review, 2003, 93, 170-92
Handle: RePEc:boc:bocoec:485
Contact details of provider: Postal: Boston College, 140 Commonwealth Avenue, Chestnut Hill MA 02467 USA
Phone: 617-552-3670
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Web page: http://fmwww.bc.edu/EC/Email:


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