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Trade Costs and Economic Development

Michele Fratianni and Francesco Marchionne ()

No 2011-01, Working Papers from Indiana University, Kelley School of Business, Department of Business Economics and Public Policy

Abstract: We test the hypothesis of the circular causality between trade costs and degree of economic development using data on Italian provinces. Using different methods to control for multilateral resistance, we apply a gravity equation to estimate sectoral exports to 188 countries over the period 1995-2004. Provincial trade costs are constructed as the sum of five province-specific elasticities, including distance, adjacency, and common money. We find that Italian provinces are heterogeneous with respect to trade costs. These costs are influenced by lagged provincial per capita income and industrial structure. In turn, trade costs influence future provincial per capita income. This two-way relationship between trade costs and income is broadly consistent with the cumulative causation process emphasized by the New Economic Geography.

Keywords: trade costs; heterogeneity; economic development; gravity equation (search for similar items in EconPapers)
JEL-codes: F10 F14 O52 R12 (search for similar items in EconPapers)
Date: 2011-01
New Economics Papers: this item is included in nep-dev and nep-int
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Trade Costs and Economic Development (2012) Downloads
Journal Article: Trade Costs and Economic Development (2012) Downloads
Working Paper: Trade Costs and Economic Development (2011) Downloads
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