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Gravity with gravitas: comment

In GRAVITY WITH GRAVITAS: A SOLUTION TO THE BORDER PUZZLE, Anderson and Van Wincoop (2003) estimate what trade between US states and Canadian provinces would have been if the border between Canada and the United States had not existed. They showed that computing the border effect requires solving a non-linear system of multilateral price indexes. This note shows that the non-linear system can be solved analytically, such that a numerical approximation is no longer needed. The exact solution yields a reduced-form log-linear gravity equation that can be estimated using standard econometric techniques. After estimation, the calculation of treatment effects like the border effect is straightforward. Using the same data and assumptions, I find that the border effect for Canada is half as large as reported by Anderson and Van Wincoop.

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Paper provided by CPB Netherlands Bureau for Economic Policy Analysis in its series CPB Discussion Paper with number 111.

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Date of creation: Sep 2008
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Handle: RePEc:cpb:discus:111
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  1. Millimet, Daniel & Henderson, Daniel, 2006. "Is Gravity Linear?," Departmental Working Papers 0517, Southern Methodist University, Department of Economics.
  2. Dennis Novy, 2011. "Gravity Redux: Measuring International Trade Costs with Panel Data," CESifo Working Paper Series 3616, CESifo Group Munich.
  3. James E. Anderson & Eric van Wincoop, 2003. "Gravity with Gravitas: A Solution to the Border Puzzle," American Economic Review, American Economic Association, vol. 93(1), pages 170-192, March.
  4. David S. Jacks & Christopher M. Meissner & Dennis Novy, 2008. "Trade Costs, 1870-2000," American Economic Review, American Economic Association, vol. 98(2), pages 529-34, May.
  5. Maurice Obstfeld & Kenneth Rogoff, 2000. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," NBER Working Papers 7777, National Bureau of Economic Research, Inc.
  6. McCallum, John, 1995. "National Borders Matter: Canada-U.S. Regional Trade Patterns," American Economic Review, American Economic Association, vol. 85(3), pages 615-23, June.
  7. Baier, Scott L. & Bergstrand, Jeffrey H., 2009. "Bonus vetus OLS: A simple method for approximating international trade-cost effects using the gravity equation," Journal of International Economics, Elsevier, vol. 77(1), pages 77-85, February.
  8. 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.
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