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The gravity equation with micro-founded trade costs

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  • Rudolph, Stephan

Abstract

Gravity Equations are broadly used to estimate the impacts of trade impediments on trade flows. It is often stated that results are implausibly high. In theoretical foundations of the gravity equation, trade costs usually enter as icebergmelting-costs. This paper offers an alternative approach to model trade costs. From a microeconomic point of view, trade costs should depend on trade input prices and - which is new - the underlying trade volume. If trade costs are determined by the trade volume, and average trade costs are falling with the trade volume (e.g. due to economies of scale in the trade sector), empirical results from gravity equations are likely to be biased.

Suggested Citation

  • Rudolph, Stephan, 2009. "The gravity equation with micro-founded trade costs," Dresden Discussion Paper Series in Economics 11/09, Technische Universität Dresden, Faculty of Business and Economics, Department of Economics.
  • Handle: RePEc:zbw:tuddps:1109
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    References listed on IDEAS

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    Cited by:

    1. Fabien CANDAU & Florent DEISTING & Julie SCHLICK, 2016. "How Income and Crowding Eects inuence the World Market for French Wines," Working Papers 2015-2016_8, CATT - UPPA - Université de Pau et des Pays de l'Adour, revised Mar 2016.
    2. Rudolph, Stephan, 2010. "Estimating gravity equations with endogeneous trade costs," Dresden Discussion Paper Series in Economics 01/10, Technische Universität Dresden, Faculty of Business and Economics, Department of Economics.
    3. Julia Spies & Joern Kleinert, 2011. "Transport Costs in International Trade," ERSA conference papers ersa11p625, European Regional Science Association.
    4. Joern Kleinert & Julia Spies, 2011. "Endogenous Transport Costs in International Trade," IAW Discussion Papers 74, Institut für Angewandte Wirtschaftsforschung (IAW).
    5. repec:bla:worlde:v:40:y:2017:i:5:p:963-977 is not listed on IDEAS

    More about this item

    Keywords

    gravity equation; trade costs; estimation bias;

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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