Gravity with Gravitas: A Solution to the Border Puzzle
Top Cited Papers
Open Access
- 1 February 2003
- journal article
- Published by American Economic Association in American Economic Review
- Vol. 93 (1) , 170-192
- https://doi.org/10.1257/000282803321455214
Abstract
Gravity equations have been widely used to infer trade flow effects of various institutional arrangements. We show that estimated gravity equations do not have a theoretical foundation. This implies both that estimation suffers from omitted variables bias and that comparative statics analysis is unfounded. We develop a method that (i) consistently and efficiently estimates a theoretical gravity equation and (ii) correctly calculates the comparative statics of trade frictions. We apply the method to solve the famous McCallum border puzzle. Applying our method, we find that national borders reduce trade between industrialized countries by moderate amounts of 20–50 percent.Keywords
All Related Versions
This publication has 11 references indexed in Scilit:
- Insecurity and the Pattern of Trade: An Empirical InvestigationThe Review of Economics and Statistics, 2002
- Measuring internal trade distances: a new method applied to estimate provincial border effects in CanadaCanadian Journal of Economics/Revue canadienne d'économique, 2001
- Increasing Returns Versus National Product Differentiation as an Explanation for the Pattern of U.S.–Canada TradeAmerican Economic Review, 2001
- Export entry and exit by German firmsReview of World Economics, 2001
- One money, one market: the effect of common currencies on tradeEconomic Policy, 2000
- Canadian Provinces in World Trade: Engagement and DetachmentCanadian Journal of Economics/Revue canadienne d'économique, 1999
- The Euro and International Equity FlowsJournal of the Japanese and International Economies, 1998
- Regional trade and “the medicine line”: The national border effect in U.S. commodity flow dataJournal of Borderlands Studies, 1998
- Do National Borders Matter for Quebec's Trade?Canadian Journal of Economics/Revue canadienne d'économique, 1996
- The Gravity Equation in International Trade: Some Microeconomic Foundations and Empirical EvidenceThe Review of Economics and Statistics, 1985