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Home and Regional Biases and Border Effects in Armington Type Models

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  • John Whalley
  • Xian Xin

Abstract

We discuss biases in preferences and their trade effects in terms of impacts on non-neutral trade flows motivated by recent literature on both home bias and the border effect. These terms take on multiple definitions in the literature and are often used interchangeably even though they differ. The border effect refers to a higher proclivity to trade behind rather than across national borders and is usually defined by the coefficients of regional dummies from an estimated gravity model. It can be present both in data and in counterfactual model solutions. Sometimes the reduced form of the gravity model used is asserted to reflect an Armington type model. For the border effect to occur as a model outcome, a structural model with at least 2 home regions and 1 country abroad is needed. In contrast to current literature, we offer a characterization of various forms of preference bias in trade models and measures of their associated trade effects based on a concept we term trade neutrality. These effects go beyond conventional border effects, and can be both across and within borders. Home bias is typically specified as an Armington preference for domestic over comparable foreign products in a trade model where goods are heterogeneous across countries. It is reflected in both model structure and parameterization, but defined in several different ways in the literature. We assess the contribution of each form of bias to the set of possible trade effects using a calibrated model with 3 Canadian regions, the U.S., and the rest of the world using 2001 data. We also evaluate how much of the conventional border effect is accounted for when model biases are modified in various ways.

Suggested Citation

  • John Whalley & Xian Xin, 2006. "Home and Regional Biases and Border Effects in Armington Type Models," NBER Working Papers 12439, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:12439
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    References listed on IDEAS

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    Cited by:

    1. Kuhn, Peter J. & McAusland, Carol, 2008. "Consumers and the Brain Drain: Product Design and the Gains from Emigration," IZA Discussion Papers 3602, Institute for the Study of Labor (IZA).
    2. Douglas Hodgson & Aylin Seçkin, 2012. "Dynamic price dependence of Canadian and international art markets: an empirical analysis," Empirical Economics, Springer, vol. 43(2), pages 867-890, October.
    3. Liu, Xiaoyun & Wang, Xiuqing & Whalley, John & Xin, Xian, 2011. "Technological change and China's regional disparities — A calibrated equilibrium analysis," Economic Modelling, Elsevier, vol. 28(1), pages 582-588.
    4. Liu, Xiaoyun & Whalley, John & Xin, Xian, 2010. "Non-tradable goods and the border effect puzzle," Economic Modelling, Elsevier, vol. 27(5), pages 909-914, September.
    5. Xiaoyun Liu & Xiuqing Wang & Xian Xin, 2012. "Did agricultural technological changes affect China's regional disparity?," China Agricultural Economic Review, Emerald Group Publishing, vol. 4(4), pages 440-449, November.
    6. Oxana Babecká Kucharčuková & Jan Babecký & Martin Raiser, 2012. "Gravity Approach for Modelling International Trade in South-Eastern Europe and the Commonwealth of Independent States: The Role of Geography, Policy and Institutions," Open Economies Review, Springer, vol. 23(2), pages 277-301, April.
    7. John Whalley & Xian Xin, 2007. "Regionalization, Changes in Home Bias, and the Growth of World Trade," NBER Working Papers 13023, National Bureau of Economic Research, Inc.
    8. Douglas HODGSON & Aylin SECKIN, "undated". "Dynamic Price Dependence of Canadian and World Art Markets: An Empirical Analysis," EcoMod2010 259600074, EcoMod.
    9. Oxana Babecka Kucharcukova & Jan Babecky & Martin Raiser, 2010. "A Gravity Approach to Modelling International Trade in South-Eastern Europe and the Commonwealth of Independent States: The Role of Geography, Policy and Institutions," Working Papers 2010/04, Czech National Bank, Research Department.
    10. Kuhn, Peter & McAusland, Carol, 2009. "Consumers and the brain drain: Product and process design and the gains from emigration," Journal of International Economics, Elsevier, vol. 78(2), pages 287-291, July.

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    • F10 - International Economics - - Trade - - - General

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