Gravity with Gravitas: A Solution to the Border Puzzle
Authors: Anderson, James E.; van Wincoop, Eric
Source: The American Economic Review, Volume 93, Number 1, 1 March 2003 , pp. 170-192(23)
Publisher: American Economic Association
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.
Document Type: Forum Article
Publication date: 1 March 2003
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