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Gravity with Scale Economies

Author

Listed:
  • Anderson, James

    () (Boston College)

  • Vesselovsky, Mykyta

    () (Department of Foreign Affairs and International Trade)

  • Yotov, Yoto

    () (School of Economics LeBow College of Business Drexel University)

Abstract

We extend the structural gravity model to identify external economies or diseconomies of scale elasticities of cross-border trade. We find statistically and quantitatively significant economies of scale in cross-border trade in 5/8ths of sector-direction cases for Canadian provinces while the remaining 3/8ths of cases have constant returns to scale. Incomplete passthrough of large exchange rate changes at two year intervals from 1997 to 2007 is amplified by scale economies to produce direct effects on bilateral trade for 12 of 19 goods sectors but none of 9 services sectors.

Suggested Citation

  • Anderson, James & Vesselovsky, Mykyta & Yotov, Yoto, 2014. "Gravity with Scale Economies," School of Economics Working Paper Series 2014-4, LeBow College of Business, Drexel University.
    • Handle: RePEc:ris:drxlwp:2014_004
    as

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    References listed on IDEAS

    as
    1. Kim, MinKyoung & Cho, Guedae & Koo, Won W., 2003. "Asymmetric Pattern Of Intra-Industry Trade Between The United States And Canada," Agribusiness & Applied Economics Report 23625, North Dakota State University, Department of Agribusiness and Applied Economics.
    2. 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.
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    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, Canadian Economics Association, vol. 45(1), pages 64-92, February.
    7. James E. Anderson, 2012. "Efficient Policy In A Predatory Economy: To Him Who Hath Shall Be Given?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(1), pages 157-174, February.
    8. Mayer, Thierry & Zignago, Soledad, 2006. "Notes on CEPII’s distances measures," MPRA Paper 26469, University Library of Munich, Germany.
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    10. 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.
    11. Anderson, James E. & Bandiera, Oriana, 2006. "Traders, cops and robbers," Journal of International Economics, Elsevier, vol. 70(1), pages 197-215, September.
    12. Inmaculada Martínez-Zarzoso & Felicitas Nowak-Lehmann, 2003. "Augmented Gravity Model: An Empirical Application to Mercosur-European Union Trade Flows," Journal of Applied Economics, Universidad del CEMA, vol. 6, pages 291-316, November.
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    15. repec:ags:jaecon:43996 is not listed on IDEAS
    16. 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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    Cited by:

    1. Candau, Fabien & Rey, Serge, 2014. "The effect of the euro on aeronautic trade: A French regional analysis," Economic Modelling, Elsevier, vol. 41(C), pages 345-355.
    2. Borchert, Ingo & Yotov, Yoto V., 2017. "Distance, globalization, and international trade," Economics Letters, Elsevier, vol. 153(C), pages 32-38.
    3. repec:elg:eechap:17028_2 is not listed on IDEAS
    4. Piermartini, Roberta & Yotov, Yoto, 2016. "Estimating Trade Policy Effects with Structural Gravity," School of Economics Working Paper Series 2016-10, LeBow College of Business, Drexel University.
    5. Scott L. Baier & Amanda Kerr & Yoto V. Yotov, 2018. "Gravity, distance, and international trade," Chapters,in: Handbook of International Trade and Transportation, chapter 2, pages 15-78 Edward Elgar Publishing.
    6. Glauben, Thomas & Imamverdiyev, Nizami & Perekhozhuk, Oleksandr & Prehn, Sören, 2014. "Competitive Structure of Kazakhstan, Russia and Ukraine in World Wheat Market: Gravity Model Approach," 2014 International Congress, August 26-29, 2014, Ljubljana, Slovenia 182949, European Association of Agricultural Economists.

    More about this item

    Keywords

    Gravity; Scale Effects; Exchange Rates; Goods and Services;

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F15 - International Economics - - Trade - - - Economic Integration
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions

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