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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
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    References listed on IDEAS

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    5. Mayer, Thierry & Zignago, Soledad, 2006. "Notes on CEPII’s distances measures," MPRA Paper 26469, University Library of Munich, Germany.
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    8. Anderson, James E. & Bandiera, Oriana, 2006. "Traders, cops and robbers," Journal of International Economics, Elsevier, vol. 70(1), pages 197-215, September.
    9. 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.
    10. 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.
    11. 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.
    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.
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    14. 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.
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    Cited by:

    1. Scott L. Baier & Amanda Kerr & Yoto V. Yotov, 2018. "Gravity, distance, and international trade," Chapters, in: Bruce A. Blonigen & Wesley W. Wilson (ed.), Handbook of International Trade and Transportation, chapter 2, pages 15-78, Edward Elgar Publishing.
    2. Borchert, Ingo & Yotov, Yoto V., 2017. "Distance, globalization, and international trade," Economics Letters, Elsevier, vol. 153(C), pages 32-38.
    3. Michal Fabinger & E. Glen Weyl, 2018. "Functional Forms for Tractable Economic Models and the Cost Structure of International Trade," CIRJE F-Series CIRJE-F-1092, CIRJE, Faculty of Economics, University of Tokyo.
    4. 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.
    5. 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.
    6. Piermartini, Roberta & Yotov, Yoto V., 2016. "Estimating trade policy effects with structural gravity," WTO Staff Working Papers ERSD-2016-10, World Trade Organization (WTO), Economic Research and Statistics Division.

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    More about this item

    Keywords

    Gravity; Scale Effects; Exchange Rates; Goods and Services;
    All these keywords.

    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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