The "distance-varying" gravity model in international economics: is the distance an obstacle to trade?

Vêlayoudom Marimoutou (), Denis PEGUIN () and Anne PEGUIN-FEISSOLLE ()
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Vêlayoudom Marimoutou: GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579

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Abstract: In this paper, we address the problem of the role of the distance between trading partners by assuming the variability of coefficients in a standard gravity model. The distance can be interpreted as an indicator of the cost of entry in a market (a fixed cost): the greater the distance, the higher the entry cost, and the more we need to have a large market to be able to cover a high cost of entry. To explore this idea, the paper uses a method called Flexible Least Squares. By allowing the parameters of the gravity model to vary over the observations, our main result is that the more the partner's GDP is large, the less the distance is an obstacle to trade.

Keywords: Gravity Equation; Flexible Least Squares; Geographical Distance (search for similar items in EconPapers)
Date: 2009-05-28
Note: View the original document on HAL open archive server: http://hal.archives-ouvertes.fr/hal-00389570/en/
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Published, Economics Bulletin, 2009, 29, 2, pp. 1157-1173.

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