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Mismeasurement of Distance Effects: The Role of Internal Location of Production

Listed author(s):
  • Hakan Yilmazkuday

    ()

    (Department of Economics, Florida International University)

The estimated effects of distance in empirical international trade regressions are unrealistically high. Using state-and-sector level U.S. exports data, this paper shows analytically and proves empirically that ignoring the internal location of production (of international exports), which leads to the overestimation of distance e¡èects by about twofold, is a possible explanation. This overestimation is mostly attributed to the mismeasurement of the distance elasticity of trade costs when internal locations of production are ignored. A corrective distance index is proposed to avoid such mismeasurements and is shown to work well for the median sector. The results are robust to the consideration of alternative estimation methodologies and data sets.

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File URL: http://economics.fiu.edu/research/working-papers/2014/1412/1412.pdf
File Function: First version, 2014
Download Restriction: no

Paper provided by Florida International University, Department of Economics in its series Working Papers with number 1412.

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Length: 37 pages
Date of creation: Dec 2014
Handle: RePEc:fiu:wpaper:1412
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Fax: (305) 348-1524
Web page: http://economics.fiu.edu

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  1. Gabriel J Felbermayr & Wilhelm Kohler, 2014. "Exploring the Intensive and Extensive Margins of World Trade," World Scientific Book Chapters,in: European Economic Integration, WTO Membership, Immigration and Offshoring, chapter 4, pages 115-148 World Scientific Publishing Co. Pte. Ltd..
  2. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," Journal of Economic Literature, American Economic Association, vol. 42(3), pages 691-751, September.
  3. Christian Broda & David E. Weinstein, 2006. "Globalization and the Gains From Variety," The Quarterly Journal of Economics, Oxford University Press, vol. 121(2), pages 541-585.
  4. Yotov, Yoto V., 2012. "A simple solution to the distance puzzle in international trade," Economics Letters, Elsevier, vol. 117(3), pages 794-798.
  5. 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.
  6. Simonovska, Ina & Waugh, Michael E., 2014. "The elasticity of trade: Estimates and evidence," Journal of International Economics, Elsevier, vol. 92(1), pages 34-50.
  7. John Romalis, 2007. "NAFTA's and CUSFTA's Impact on International Trade," The Review of Economics and Statistics, MIT Press, vol. 89(3), pages 416-435, August.
  8. Yilmazkuday, Hakan, 2012. "Understanding interstate trade patterns," Journal of International Economics, Elsevier, vol. 86(1), pages 158-166.
  9. Feenstra, Robert C, 1994. "New Product Varieties and the Measurement of International Prices," American Economic Review, American Economic Association, vol. 84(1), pages 157-177, March.
  10. Mayer, Thierry & Zignago, Soledad, 2006. "Notes on CEPII’s distances measures," MPRA Paper 26469, University Library of Munich, Germany.
  11. J. M. C. Santos Silva & Silvana Tenreyro, 2006. "The Log of Gravity," The Review of Economics and Statistics, MIT Press, vol. 88(4), pages 641-658, November.
  12. Berthelon, Matias & Freund, Caroline, 2008. "On the conservation of distance in international trade," Journal of International Economics, Elsevier, vol. 75(2), pages 310-320, July.
  13. Daniel J. Henderson & Daniel L. Millimet, 2008. "Is gravity linear?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 23(2), pages 137-172.
  14. Antoni Estevadeordal & Brian Frantz & Alan M. Taylor, 2003. "The Rise and Fall of World Trade, 1870–1939," The Quarterly Journal of Economics, Oxford University Press, vol. 118(2), pages 359-407.
  15. repec:lmu:muenar:20646 is not listed on IDEAS
  16. Harrigan, James, 1996. "Openness to trade in manufactures in the OECD," Journal of International Economics, Elsevier, vol. 40(1-2), pages 23-39, February.
  17. Céline Carrère & Maurice Schiff, 2005. "On the Geography of Trade. Distance is Alive and Well," Revue économique, Presses de Sciences-Po, vol. 56(6), pages 1249-1274.
  18. Jonathan Eaton & Samuel Kortum, 2002. "Technology, Geography, and Trade," Econometrica, Econometric Society, vol. 70(5), pages 1741-1779, September.
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