Gravity with Gravitas: A Solution to the Border Puzzle

James Anderson and Eric van Wincoop

American Economic Review, 2003, vol. 93, issue 1, 170-192

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.

Date: 2003
Note: DOI: 10.1257/000282803321455214
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Working Paper: Gravity with Gravitas: A Solution to the Border Puzzle (2001)
Working Paper: Gravity with Gravitas: A Solution to the Border Puzzle (2000)
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