Applying the gravity approach to sector trade: Who bears the trade costs?

Angela Cheptea, Alexandre Gohin and Marilyne Huchet ()

No 11-01, Working Papers SMART from INRAE UMR SMART

Abstract: Thanks to its empirical success, the gravity approach is widely used to explain trade patterns between countries. In this article we question the simple application of this approach to product/sector-level trade on two grounds. First, we demonstrate that the traditional Armington version of gravity must be altered to properly account for the fact that sector expenditures are not strictly equal to sector productions because some trade costs are incurred outside the sector of interest. Secondly, we test empirically the mis-measurement of the expenditures with both Armington (1969) and Helpman and Krugman (1985) approaches. We estimate trade flows and prices simultaneously with non linear techniques. Underestimated expenditure levels yield biased values of model parameters.

Keywords: gravity; trade; econometric simulation (search for similar items in EconPapers)
JEL-codes: C13 C15 F11 F12 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2011
New Economics Papers: this item is included in nep-int
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http://ageconsearch.umn.edu/bitstream/208113/2/WP%20SMART-LERECO%2011-01.pdf (application/pdf)

Related works:
Working Paper: Applying the gravity approach to sector trade: Who bears the trade costs? (2011)
Working Paper: Applying the gravity approach to sector trade: Who bears the trade costs? (2008)
Working Paper: Applying the gravity approach to sector trade: who bears the trade costs? (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:rae:wpaper:201101

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