North, South and Distance in the Gravity Model
It is generally assumed that distance in the gravity model strictly reflects frictions impedingbilateral trade. However, distances North-South could also reflect differences in factorendowment that provide opportunities for profitable trade. This paper investigates the hypothesisthat if we control for distance in the ordinary sense, differences North-South promoteinternational trade. The hypothesis receives ample support. Moreover, the significance of differencesNorth-South survives a battery of robustness tests, concerning period, distinctionsbetween differences in latitude North-North, North-South and South-South, and controls forother measures of differences in factor endowment, such as differences in per capita outputand differences in average temperature, rainfall, and seasonal range in temperature. The impactof differences North-South on bilateral trade has also been falling. This decline, in turn,might be partly responsible for the weakening of the influence of distance that has been occurringsince World War II. This last hypothesis receives confirmation as well. Finally, thepaper studies two country-specific aspects of distance: internal distance and remoteness. Itdoes so by examining the impact of both on the country fixed effects themselves: that is, thosethat emerged earlier. Internal distance turns out to have a far greater impact than remoteness –by an order of ten.
|Date of creation:||2005|
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