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Applying the gravity approach to sector trade: Who bears the trade costs?

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  • Angela Cheptea
  • Alexandre Gohin
  • Marilyne Huchet Bourdon

Abstract

Thanks to its empirical success, the gravity approach is widely used to explain trade patterns between countries. In this article we question the simple application of this approach to product/sector-level trade on two grounds. First, we demonstrate that the traditional Armington version of gravity must be altered to properly account for the fact that sector expenditures are not strictly equal to sector productions because some trade costs are incurred outside the sector of interest. Secondly, we test empirically the mis-measurement of the expenditures with both Armington (1969) and Helpman and Krugman (1985) approaches. We estimate trade flows and prices simultaneously with non linear techniques. Underestimated expenditure levels yield biased values of model parameters.

Suggested Citation

  • Angela Cheptea & Alexandre Gohin & Marilyne Huchet Bourdon, 2011. "Applying the gravity approach to sector trade: Who bears the trade costs?," Working Papers SMART - LERECO 11-01, INRA UMR SMART-LERECO.
  • Handle: RePEc:rae:wpaper:201101
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    References listed on IDEAS

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    More about this item

    Keywords

    gravity; trade; econometric simulation;

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General

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