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GRAVITY REDUX: MEASURING INTERNATIONAL TRADE COSTS WITH PANEL DATA

Authors

  • DENNIS NOVY

    1. Novy: Department of Economics and Centre for Competitive Advantage in the Global Economy (CAGE), University of Warwick, Coventry CV4 7AL, UK. Phone +44-2476-150046, Fax +44-2476-523032, E-mail d.novy@warwick.ac.uk; Centre for Economic Policy Research (CEPR), London, UK; CESifo, Munich, Germany; Centre for Economic Performance (CEP), London, UK.
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    • I am grateful to participants at the NBER Summer Institute, in particular, James Harrigan, David Hummels, Nuno Limão, and Peter Neary. I am also grateful to Iwan Barankay, Jeffrey Bergstrand, Natalie Chen, Alejandro Cu ñat, Robert Feenstra, David Jacks, Christopher Meissner, Nikolaus Wolf, Adrian Wood, seminar participants at Oxford University, at the University of Western Ontario, and at the European Trade Study Group. I gratefully acknowledge research support from the Economic and Social Research Council, Grant RES-000-22-3112.


Abstract

Barriers to international trade are known to be large but because of data limitations it is hard to measure them directly for a large number of countries over many years. To address this problem, I derive a micro-founded measure of bilateral trade costs that indirectly infers trade frictions from observable trade data. I show that this trade cost measure is consistent with a broad range of leading trade theories including Ricardian and heterogeneous firms models. In an application I show that U.S. trade costs with major trading partners declined on average by about 40 between 1970 and 2000, with Mexico and Canada experiencing the biggest reductions. (JEL F10, F15)

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