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Universal Gravity

Author

Listed:
  • Costas Arkolakis

    (Yale University)

  • Treb Allen

    (Northwestern University)

Abstract

What is the best way to reduce trade frictions when resources are scarce? To answer this question, we develop a framework that nests previous general equilibrium gravity models and show that the macro-economic implications of these various models depend crucially on two key model parameters, which we term the "gravity constants." Based only on the value of the gravity constants, we derive sufficient conditions for the existence and uniqueness of the trade equilibrium and, given observed trade flows, completely characterize all comparative statics for any change in bilateral trade frictions. We then develop a methodology for estimating these gravity constants without needing to assume a particular micro-foundation of the gravity trade model. Finally, we use these results to derive the set of trade friction reductions that (to a first-order) maximize welfare gains given an arbitrary constraint.

Suggested Citation

  • Costas Arkolakis & Treb Allen, 2015. "Universal Gravity," 2015 Meeting Papers 28, Society for Economic Dynamics.
    • Handle: RePEc:red:sed015:28
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    Cited by:

    1. Egger, Peter H. & Nigai, Sergey, 2015. "Structural gravity with dummies only: Constrained ANOVA-type estimation of gravity models," Journal of International Economics, Elsevier, vol. 97(1), pages 86-99.
    2. Pablo D Fajgelbaum & Eduardo Morales & Juan Carlos Suárez Serrato & Owen Zidar, 2019. "State Taxes and Spatial Misallocation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 86(1), pages 333-376.
    3. Ferdinando Monte & Stephen J. Redding & Esteban Rossi-Hansberg, 2018. "Commuting, Migration, and Local Employment Elasticities," American Economic Review, American Economic Association, vol. 108(12), pages 3855-3890, December.
    4. Elisabeth Christen & Sandra Bilek-Steindl & Christian Glocker & Harald Oberhofer, 2016. "Austria 2025 – Austria's Competitiveness and Export Potentials in Selected Markets," WIFO Studies, WIFO, number 59182, June.
    5. Konstantin Kucheryavyy & Gary Lyn & Andrés Rodríguez-Clare, 2023. "Grounded by Gravity: A Well-Behaved Trade Model with Industry-Level Economies of Scale," American Economic Journal: Macroeconomics, American Economic Association, vol. 15(2), pages 372-412, April.
    6. Jean‐Noël Barrot & Erik Loualiche & Matthew Plosser & Julien Sauvagnat, 2022. "Import Competition and Household Debt," Journal of Finance, American Finance Association, vol. 77(6), pages 3037-3091, December.
    7. Hakan Yilmazkuday, 2021. "Decomposing the Gains From Trade Through the Standard Gravity Variables," International Economic Journal, Taylor & Francis Journals, vol. 35(1), pages 13-45, January.
    8. Stephen J. Redding & Esteban Rossi-Hansberg, 2017. "Quantitative Spatial Economics," Annual Review of Economics, Annual Reviews, vol. 9(1), pages 21-58, September.
    9. Harald Oberhofer & Michael Pfaffermayr, 2021. "Estimating the trade and welfare effects of Brexit: A panel data structural gravity model," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 54(1), pages 338-375, February.
    10. Hakan Yilmazkuday, 2021. "Drivers of Global Trade: A Product-Level Investigation," International Economic Journal, Taylor & Francis Journals, vol. 35(4), pages 469-485, October.
    11. Harald Oberhofer & Christian Glocker & Werner Hölzl & Peter Huber & Serguei Kaniovski & Klaus Nowotny & Michael Pfaffermayr & Monique Ebell & Nikolaos Kontogiannis, 2016. "Single Market Transmission Mechanisms Before, During and After the 2008-09 Crisis. A Quantitative Assessment," WIFO Studies, WIFO, number 59156, June.
    12. Ben Li & Penglong Zhang, 2016. "International Geopolitics," Boston College Working Papers in Economics 909, Boston College Department of Economics, revised 06 Feb 2017.
    13. Peter Egger & Kevin Staub, 2016. "GLM estimation of trade gravity models with fixed effects," Empirical Economics, Springer, vol. 50(1), pages 137-175, February.
    14. Mario Larch & Yoto V. Yotov, 2016. "General Equilibrium Trade Policy Analysis with Structural Gravity," CESifo Working Paper Series 6020, CESifo.
    15. Egger, Peter & Nigai, Sergey, 2015. "Structural Gravity with Dummies Only," CEPR Discussion Papers 10427, C.E.P.R. Discussion Papers.
    16. Michel Fouquin & Jules Hugot, 2016. "Back to the Future: International Trade Costs and the Two Globalizations," Vniversitas Económica, Universidad Javeriana - Bogotá, vol. 0(0), pages 1-35.
    17. Rodrigo Adao & Arnaud Costinot & Dave Donaldson, 2017. "Nonparametric Counterfactual Predictions in Neoclassical Models of International Trade," American Economic Review, American Economic Association, vol. 107(3), pages 633-689, March.
    18. Pengfei Wang & Danyang Xie, 2018. "Trade, Sectorial Reallocation, and Growth," Annals of Economics and Finance, Society for AEF, vol. 19(1), pages 49-74, May.
    19. Rodolfo Campos & Jacopo Timini, 2023. "Latin America and the Caribbean: trade relations in the face of global geopolitical fragmentation risks," Economic Bulletin, Banco de España, issue 2023/Q1.
    20. James E. Anderson & Mario Larch & Yoto V. Yotov, 2015. "Estimating General Equilibrium Trade Policy Effects: GE PPML," CESifo Working Paper Series 5592, CESifo.
    21. Natalia Ramondo, 2015. "Innovation and Production in the Global Economy," 2015 Meeting Papers 183, Society for Economic Dynamics.

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    JEL classification:

    • F1 - International Economics - - Trade

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