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Gravity Channels in Trade

Listed author(s):
  • Hou, Yulin

    ()

    (Florida International University)

  • Wang, Yun

    ()

    (Florida International University)

  • Yilmazkuday, Hakan

    ()

    (Florida International University)

Gravity variables such as distance, adjacency, colony, free trade agreements or language are used to capture the effects of trade costs in empirical studies. By using actual data on trade costs, this paper decomposes the overall effects of such variables on trade into those through three gravity channels: duties/tariffs (DC), transportation costs (TC), and dyadicpreferences (PC). When PC is ignored as is typical in existing studies in the literature, it is shown that nearly all gravity effects are due to distance, 29 percent through DC and 71 percent through TC. The tables turn as the additional channel of PC is introduced and shown to dominate other channels, with adjacency contributing about 45 percent, distance about 32 percent, colony about 14 percent, free trade agreements about 7 percent, and language about 2 percent. It is implied that gravity variables mainly capture the effects of demand shifters rather than supply shifters (as implied by the existing literature). The results are further connected to several existing discussions in the literature, such as welfare gains from trade and the distance puzzle.

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File URL: https://www.dallasfed.org/institute/~/media/documents/institute/wpapers/2017/0297.pdf
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Paper provided by Federal Reserve Bank of Dallas in its series Globalization and Monetary Policy Institute Working Paper with number 297.

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Length: 81 pages
Date of creation: 01 Jan 2017
Handle: RePEc:fip:feddgw:297
DOI: 10.24149/gwp297
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  8. Yilmazkuday, Hakan, 2016. "Constant versus variable markups: Implications for the law of one price," International Review of Economics & Finance, Elsevier, vol. 44(C), pages 154-168.
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  10. Head, Keith & Mayer, Thierry & Ries, John, 2010. "The erosion of colonial trade linkages after independence," Journal of International Economics, Elsevier, vol. 81(1), pages 1-14, May.
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  17. repec:bla:reviec:v:25:y:2017:i:3:p:649-676 is not listed on IDEAS
  18. Demet Yilmazkuday & Hakan Yilmazkuday, 2014. "Bilateral versus Multilateral Free Trade Agreements: A Welfare Analysis," Review of International Economics, Wiley Blackwell, vol. 22(3), pages 513-535, August.
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  26. Hakan Yilmazkuday, 2016. "A Solution to the Missing Globalization Puzzle by Non-CES Preferences," Working Papers 1608, Florida International University, Department of Economics.
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