The Gravity Model in International Trade: Advances and Applications

Title......Page 5
Copyright......Page 6
Contents......Page 7
List of figures......Page 9
List of tables......Page 11
List of contributors......Page 14
1.1 Introduction......Page 17
1.2.1 The history of gravity......Page 20
1.2.2 The micro-foundation of gravity......Page 23
1.2.3.1 Multilateral resistance......Page 27
1.2.3.2 Zero trade flows......Page 29
1.2.3.3 Measurement of distance......Page 30
1.2.3.4 Micro-data and product groups......Page 31
1.3 About this book......Page 32
1.3.1 Methodology......Page 33
1.3.2 Distance in the gravity model......Page 34
1.3.3 Specific applications......Page 36
1.4 The road ahead......Page 38
REFERENCES......Page 39
Part I Methodology......Page 43
1 Introduction......Page 45
2 Decomposing aggregate bilateral trade flows into final and intermediate goods trade flows......Page 47
3 The theoretical model......Page 52
3.1 Consumers......Page 54
3.2 Final differentiated good producers......Page 58
3.4 Intermediate differentiated goods producers......Page 61
3.5 Profit functions and pricing equations......Page 63
4 Calibration of the model......Page 65
4.1 Exogenous variables......Page 66
4.2 Other parameter values......Page 67
5.1 Economic size and similarity......Page 69
5.1.2 Proposition 2......Page 72
5.2 Trade and investment costs......Page 73
5.2.2 Proposition 5......Page 74
6.1 Specifications and data......Page 75
6.2 Empirical results......Page 76
6.3 Robustness analysis......Page 79
7 Conclusions......Page 81
REFERENCES......Page 82
APPENDIX......Page 85
3 The incidence of gravity......Page 87
1 Trade frictions and incidence......Page 88
2 Determination of incidence......Page 94
3 Incidence in practice......Page 97
4.1 Allocation for given world prices......Page 98
5 Conclusion......Page 102
REFERENCES......Page 103
1 Introduction......Page 104
2 Background......Page 109
2.1 The A-vW theoretical model......Page 110
2.2 The econometric model......Page 112
3 Theory......Page 113
4 Estimation......Page 119
4.1 Estimation using the McCallum–A-vW–Feenstra dataset for actual Canadian–US trade flows......Page 121
4.2.1 Monte Carlo analysis 1......Page 125
4.2.2 Monte Carlo analysis 2......Page 128
4.3 Potential uses of the approximation method......Page 130
5 Comparative statics: when does the approximation method work well, and why......Page 132
5.1 Analytical estimates of country-specific comparative statics using the approximation approach......Page 133
5.1.1 A-vW’s implication 1......Page 134
5.1.2 A-vW’s implication 2......Page 135
5.2.1 NAFTA......Page 136
5.2.2 The European Economic Area......Page 138
5.2.4 Summary......Page 140
5.3.1 A second-order Taylor-series expansion......Page 141
5.3.2 The role of…as the source of approximation errors......Page 142
6 Conclusions......Page 145
REFERENCES......Page 146
APPENDIX......Page 148
1 Introduction......Page 151
2.1 Aggregate supply......Page 153
2.3 Geographical allocation of demand......Page 154
2.6 Equilibrium......Page 155
2.7 Alternative theoretical foundations of the extended gravity model......Page 157
3 The extended gravity model......Page 160
3.2 Indices of the geo-economic position......Page 161
3.3 Substitution structure......Page 162
3.4 Econometric issues......Page 163
4 Estimation results......Page 164
4.1 Comparison of the gravity model with the EGM......Page 165
4.2 Interpretation of the EGM parameter estimates......Page 167
4.3 Individual parameter estimates......Page 168
4.4 The indices of the geo-economic position......Page 171
5 Conclusions......Page 172
REFERENCES......Page 173
APPENDIX A : EXPLANATION OF THE DATA USED......Page 175
APPENDIX B : ESTIMATES OF VARIANTS ON THE MAIN MODELS......Page 177
Part II Distance in the gravity model......Page 179
1 Introduction......Page 181
2.1 Between-unit distances......Page 183
2.2 Within-unit distances......Page 184
3 Effective distances between “states”......Page 187
4.1 States along a line......Page 189
4.2 States on a plane......Page 191
5 Estimating border effects......Page 193
6 Empirical applications......Page 198
6.1 The impact of “borders” within the United States......Page 199
6.3 Transportability......Page 201
7 Conclusion......Page 205
REFERENCES......Page 206
1 Introduction......Page 209
2.1 The basic NEG model......Page 212
2.2.1 Direct non-linear estimation of the wage equation......Page 215
2.2.2 Two-step linear estimation of the wage equation making use of trade data......Page 216
3 The trade cost function......Page 218
ii. Variables included......Page 220
5 Estimation results: trade costs and market access......Page 226
5.1 Inferring trade costs from trade flows......Page 227
5.2 Varying trade costs and the impact on market access......Page 230
5.3 Trade costs and the spatial reach of an income shock in Belgium......Page 232
6 Conclusions......Page 236
REFERENCES......Page 237
APPENDIX......Page 239
1 Introduction......Page 240
2 The gravity model in international trade......Page 242
3.1 The network view on trade......Page 244
3.3 Cultural differences as trade barrier......Page 246
4.1 Trade data......Page 248
4.2 Multidimensional distance......Page 250
4.3 Estimation method......Page 251
5.1 An update of Rauch (1999)......Page 253
5.2 The impact of cultural and institutional distance......Page 257
5.3 More detailed product groups......Page 260
6 Conclusions......Page 262
REFERENCES......Page 263
APPENDIX: DESCRIPTION OF THE DATASET......Page 265
Part III Specific applications......Page 269
1 Introduction......Page 271
2 Literature survey......Page 272
3.1 Pure reputation model......Page 273
3.2 Solving the model......Page 275
3.3 Adding punishment via international environmental arrangements......Page 278
4 Empirics......Page 279
4.1 Specification......Page 280
4.2 Data......Page 282
4.3 Results......Page 283
REFERENCES......Page 286
9.A.1 Proof of proposition 1......Page 287
9.A.2.1 Conditions for separating equilibrium......Page 288
1 Introduction......Page 294
2 The trade transition......Page 296
3 Data and methodology......Page 299
3.1 Discussion of data......Page 303
4 Results......Page 304
5 Conclusions......Page 306
REFERENCES......Page 308
APPENDIX: DERIVATION OF EQUATION 10.2......Page 309
1 Introduction......Page 312
2 Cross-border M&As......Page 316
3 Methodology and estimation strategy......Page 321
4.1 Baseline estimations......Page 323
4.2.2 Market structure......Page 326
4.3 Market potential......Page 327
4.4 The baseline model over time......Page 328
5 Conclusions......Page 330
REFERENCES......Page 331
APPENDIX A : REGIONAL DISTRIBUTION OF CROSS-BORDER M&AS......Page 334
APPENDIX B : BASELINE ESTIMATIONS WITH DIFFERENT FINANCIAL MARKET VARIABLES......Page 335
1 Introduction and main findings......Page 339
2 General empirical framework......Page 341
3 Economic distance......Page 344
3.1 Why proximity matters......Page 345
3.2.1 Population density, sum of distances, and market potential......Page 346
3.2.2 Market and supplier access......Page 347
3.2.3 Comparison of the different measures......Page 349
3.3 Empirical analysis: augmented Solow model and proximity......Page 352
4 Transport costs......Page 359
4.1 Evolution of transport and telecommunications cost indices......Page 360
4.2 Impact of transport costs on openness to trade and GDP per capita......Page 361
5 Conclusion and policy implications......Page 366
REFERENCES......Page 367
Index......Page 371