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Gravity Redux: Measuring International Trade Costs with Panel Data

  • Dennis Novy

Barriers to international trade are known to be large but due to data limitations it is hard to measure them directly for a large number of countries over many years. To address this problem I derive a micro-founded measure of bilateral trade costs that indirectly infers trade frictions from observable trade data. I show that this trade cost measure is consistent with a broad range of leading trade theories including Ricardian and heterogeneous firms models. In an application I show that U.S. trade costs with major trading partners declined on average by about 40 percent between 1970 and 2000, with Mexico and Canada experiencing the biggest reductions.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp1114.

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Date of creation: Jan 2012
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Handle: RePEc:cep:cepdps:dp1114
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