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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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    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. Jean-François Brun & Céline Carrère & Patrick Guillaumont & Jaime de Melo, 2015. "Has Distance Died? Evidence from a Panel Gravity Model," World Scientific Book Chapters,in: Developing Countries in the World Economy, chapter 13, pages 299-320 World Scientific Publishing Co. Pte. Ltd..
    3. Pinelopi Koujianou Goldberg & Michael M. Knetter, 1997. "Goods Prices and Exchange Rates: What Have We Learned?," Journal of Economic Literature, American Economic Association, pages 1243-1272.
    4. 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.
    5. Mayer, Thierry & Zignago, Soledad, 2006. "Notes on CEPII’s distances measures," MPRA Paper 26469, University Library of Munich, Germany.
    6. 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.
    7. 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.
    8. 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.
    9. 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.
    10. 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.
    11. 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.
    12. Anderson, James E. & Bandiera, Oriana, 2006. "Traders, cops and robbers," Journal of International Economics, Elsevier, vol. 70(1), pages 197-215, September.
    13. 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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    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. 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.
    4. Baier, Scott & Kerr, Amanda & Yotov, Yoto, 2017. "Gravity, Distance, and International Trade," School of Economics Working Paper Series 2017-5, LeBow College of Business, Drexel University.
    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.

    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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