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  3. American Economic Review
  4. March 2003
  5. Gravity with Gravitas: A Solution to the Border Puzzle

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Gravity with Gravitas: A Solution to the Border Puzzle

  • James E. Anderson
  • Eric van Wincoop
American Economic Review
vol. 93, no. 1, March 2003
(pp. 170–192)
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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.

Citation

Anderson, James, E., and Eric van Wincoop. 2003. "Gravity with Gravitas: A Solution to the Border Puzzle ." American Economic Review, 93 (1): 170–192. DOI: 10.1257/000282803321455214

JEL Classification

  • F14 Empirical Studies of Trade