Transportation Infrastructure and Trade

This paper offers a variant of Ricardian model able to structurally interpret the estimate of country-specific variable—transportation infrastructure in a commonly used fixed effect gravity estimation. Guided by this new theoretical framework, this paper shows that transportation infrastructure enhances international trade more than internal trade and this result is robust to various estimation methods and different versions of transportation infrastructure measures. Moreover, it shows that the transportation infrastructure has a non-negative effect on internal trade. Further quantitative analysis suggests 10% increase in transportation infrastructure induce 3.9% increase in real income and more than 95% of the gains concentrate on the infrastructure improving country. All the above results suggest that better infrastructure leads to sizable gains providing additional empirical support to policies aiming to improve transportation infrastructure. This paper also suggests, contrary to what ACR formula claims, domestic goods expenditure share change is no longer sufficient to predict how real income changes.