Inverted Gravity

James Anderson, Mario Larch and Yoto Yotov

No 35897, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We invert structural gravity to recover trade cost changes delivering targeted outcomes. For attainable welfare targets, one instrument per target yields a unique solution. At unchanged producer prices and to first order, each instrument must change by the welfare target divided by its own expenditure share; the required domestic change is about the size of the target, while the import change is several times larger. Inverting observed trade flows gives a separate trade cost change for each of the two directions in which a pair of countries trades. Applications to NAFTA and world trade illustrate the benefits of our approach.

JEL-codes: F10 F13 F14 (search for similar items in EconPapers)
Date: 2026-10
Note: ITI
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