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Gravity-defying trade

Santos Silva, Joao M C and Tenreyro, Silvana (2003) Gravity-defying trade. Working Paper. Federal Reserve Bank of Boston.

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Heteroskedasticity and the existence of zero values in bilateral-trade data lead to significant biases in standard estimations of the gravity equation. We propose a new estimation technique that addresses these problems, and provide novel estimates of the gravity equation. Three results stand out. First, contrary to general belief, income elasticities are significantly smaller than 1, suggesting modifications to standard trade models. Second, simple estimators of the gravity equation greatly exaggerate the roles of distance and colonial links. Finally, bilateral trade between countries that have signed a free-trade agreement is 30 percent larger than that between other countries, a magnitude remarkably different from that predicted by conventional methods (above 100 percent).

Item Type: Monograph (Working Paper)
Uncontrolled Keywords: Free trade
Subjects: H Social Sciences > HB Economic Theory
Divisions: Faculty of Social Sciences > Economics, Department of
Depositing User: Jim Jamieson
Date Deposited: 07 Aug 2012 14:58
Last Modified: 07 Aug 2012 14:58

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