The "distance-varying" gravity model in international economics: is the distance an obstacle to trade?
In this paper, we address the problem of the role of the distance between trading partners by assuming the variability of coefficients in a standard gravity model. The distance can be interpreted as an indicator of the cost of entry in a market (a fixed cost): the greater the distance, the higher the entry cost, and the more we need to have a large market to be able to cover a high cost of entry. To explore this idea, the paper uses a method called Flexible Least Squares. By allowing the parameters of the gravity model to vary over the observations, our main result is that the more the partner's GDP is large, the less the distance is an obstacle to trade.
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