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Gravity, Scale and Exchange Rates

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  • James E. Anderson
  • Mykyta Vesselovsky
  • Yoto V. Yotov

Abstract

We develop a structural gravity model that introduces scale effects in bilateral trade. Scale effects and incomplete passthrough give two channels through which exchange rates have real effects on trade patterns. Estimates from Canadian provincial trade data identify these effects through their interaction with the US border. We find statistically and quantitatively significant economies of scale in cross-border trade in almost 2/3 of sectors. Real effects of exchange rate changes on trade are found for 12 of 19 goods sectors and none of 9 services sectors.

Suggested Citation

  • James E. Anderson & Mykyta Vesselovsky & Yoto V. Yotov, 2013. "Gravity, Scale and Exchange Rates," NBER Working Papers 18807, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:18807
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    References listed on IDEAS

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    1. Pinelopi Koujianou Goldberg & Michael M. Knetter, 1997. "Goods Prices and Exchange Rates: What Have We Learned?," Journal of Economic Literature, American Economic Association, vol. 35(3), pages 1243-1272, September.
    2. 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.
    3. James E. Anderson & Yoto V. Yotov, 2012. "Gold Standard Gravity," NBER Working Papers 17835, National Bureau of Economic Research, Inc.
    4. James E. Anderson & Yoto V. Yotov, 2010. "The Changing Incidence of Geography," American Economic Review, American Economic Association, vol. 100(5), pages 2157-2186, December.
    5. Delatte, Anne-Laure & López-Villavicencio, Antonia, 2012. "Asymmetric exchange rate pass-through: Evidence from major countries," Journal of Macroeconomics, Elsevier, vol. 34(3), pages 833-844.
    6. María Pía Olivero & Yoto V. Yotov, 2012. "Dynamic gravity: endogenous country size and asset accumulation," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 45(1), pages 64-92, February.
    7. Mayer, Thierry & Zignago, Soledad, 2006. "Notes on CEPII’s distances measures," MPRA Paper 26469, University Library of Munich, Germany.
    8. James E. Anderson & Catherine A. Milot & Yoto V. Yotov, 2011. "The Incidence of Geography on Canada's Services Trade," NBER Working Papers 17630, National Bureau of Economic Research, Inc.
    9. Martinez-Zarzoso, Inmaculada & Nowak-Lehmann, Felicitas, 2003. "Augmented Gravity Model: An Empirical Application to Mercosur-European Union Trade Flows," Journal of Applied Economics, Universidad del CEMA, vol. 6(2), pages 1-26, November.
    10. Elhanan Helpman & Marc Melitz & Yona Rubinstein, 2008. "Estimating Trade Flows: Trading Partners and Trading Volumes," The Quarterly Journal of Economics, Oxford University Press, vol. 123(2), pages 441-487.
    11. James E. Anderson, 2011. "The Gravity Model," Annual Review of Economics, Annual Reviews, vol. 3(1), pages 133-160, September.
    12. Baier, Scott L. & Bergstrand, Jeffrey H., 2007. "Do free trade agreements actually increase members' international trade?," Journal of International Economics, Elsevier, vol. 71(1), pages 72-95, March.
    13. Anderson, James E, 1979. "A Theoretical Foundation for the Gravity Equation," American Economic Review, American Economic Association, vol. 69(1), pages 106-116, March.
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    Citations

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    Cited by:

    1. Delina E. Agnosteva & James E. Anderson & Yoto V. Yotov, 2014. "Intra-national Trade Costs: Measurement and Aggregation," NBER Working Papers 19872, National Bureau of Economic Research, Inc.
    2. Fedoseeva, Svetlana, 2014. "Are Agri-food Exports any Special? Exchange Rate Nonlinearities in European Exports to the US," German Journal of Agricultural Economics, Humboldt-Universitaet zu Berlin, Department for Agricultural Economics, vol. 63(04), pages 1-12, December.
    3. Thorbecke, Willem, 2015. "China–US trade: A global outlier," Journal of Asian Economics, Elsevier, vol. 40(C), pages 47-58.
    4. Dreyer, Heiko & Fedoseeva, Svetlana & Herrmann, Roland, 2016. "Gravity Meets Pricing To Market: What A Combinedmethod Approach Tells Us On German Beer Exports," Working Papers 234640, American Association of Wine Economists.
    5. Agnes Benassy-Quere & Matthieu Bussière & Pauline Wibaux, 2018. "Trade and Currency Weapons," CESifo Working Paper Series 7112, CESifo.
    6. Camelia Turcu & Yunzhi Zhang, 2019. "Does one good deserve another? Evidence from China’s trade and aid policy," Working Papers 2019.02, International Network for Economic Research - INFER.
    7. Willem Thorbecke, 2015. "Understanding Japan's Capital Goods Exports," The Japanese Economic Review, Japanese Economic Association, vol. 66(4), pages 536-549, December.
    8. Willem Thorbecke, 2015. "Enjoying the Fruits of Their Labor: Redirecting Exports to Asian Consumers," Asian Development Review, MIT Press, vol. 32(2), pages 95-114, September.
    9. Mohd Hussain Kunroo & Irfan Ahmad Sofi & Naushad Ali Azad, 2016. "Trade implications of the Euro in EMU countries: a panel gravity analysis," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 43(2), pages 391-413, May.
    10. Fedoseeva, Svetlana, 2014. "Are Agri-food Exports any Special? Exchange Rate Nonlinearities in European Exports to the US," Journal of International Agricultural Trade and Development, Journal of International Agricultural Trade and Development, vol. 63(4).

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    More about this item

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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