Objectives Understanding the impact of distance and economy size on trade using the gravity model Apply the gravity model for the cases of FDI, and migration.

Slides:



Advertisements
Similar presentations
Industry-of-Origin Prices and PPPs:
Advertisements

Measuring the Cost of International Trade in Services Sébastien Miroudot (OECD), Jehan Sauvage (OECD) and Ben Shepherd (Developing Trade Consultants Ltd.)
Puzzles in international macroeconomics
Economics 20 - Prof. Anderson1 Multiple Regression Analysis y =  0 +  1 x 1 +  2 x  k x k + u 7. Specification and Data Problems.
PSME M1 Economic Growth Tutorial.  Introduction ◦ Review of Classic Solow Model ◦ Shortfalls of Solow ◦ Human Capital Accumulation ◦ Convergence Theory.
Irwin/McGraw-Hill © Andrew F. Siegel, 1997 and l Chapter 12 l Multiple Regression: Predicting One Factor from Several Others.
Economics 105: Statistics GH 24 due Wednesday. Hypothesis Tests on Several Regression Coefficients Consider the model (expanding on GH 22) Is “race” as.
Turun kauppakorkeakoulu  Turku School of Economics REGIONAL DIFFERENCES IN HOUSING PRICE DYNAMICS: PANEL DATA EVIDENCE European Real Estate Society 19th.
1 Empirical Evaluation of the Degree of Price Transmission from the Border to the Consumers in Mozambique Xavier Cirera and Virgulino Nhate.
6 Increasing Returns to Scale and Monopolistic Competition 1
Exports x FDI in Heterogenous Firms
Preferential Arrangements and Regional Issues in Trade Policy
Openness, Economic Growth, and Human Development: Evidence from South Asian countries from Middlesex University Department of Economics and.
1 Measuring Network Effects on Trade: Are Japanese Networks Distinctive? Theresa M. Greaney Department of Economics University of Hawai`i May 14-15, 2004.
Chapter 13 Multiple Regression
Chapter 2 World Trade: An Overview
Lecture 8 THE GRAVITY MODEL By Carlos Llano, References for the slides: Feenstra, Advanced International Economics. Ariel Economía, Francisco Requena.
Chapter 12 Multiple Regression
Further Inference in the Multiple Regression Model Prepared by Vera Tabakova, East Carolina University.
Slides prepared by Thomas Bishop Chapter 2 World Trade: An Overview.
INTRODUCTION TO INTERNATIONAL TRADE Lecturer: Pierre-Louis Vézina
Part 18: Regression Modeling 18-1/44 Statistics and Data Analysis Professor William Greene Stern School of Business IOMS Department Department of Economics.
Complementary Information How do Equity Markets Complete? Seminario Desarrollo del Mercado Bursátil en Chile SVS-ICARE-UAI Junio 2008.
Urban and Regional Economics Week 3. Tim Bartik n “Business Location Decisions in the U.S.: Estimates of the Effects of Unionization, Taxes, and Other.
Performance of Intra-COMESA Trade Integration: A comparative Study with ASEAN’s Trade Integration Ebaidalla M. Ebaidalla and Abdelrahim. A. M. Yahia University.
ECON 6012 Cost Benefit Analysis Memorial University of Newfoundland
Ch. 2: World Trade: An Overview 1. 47,390 WORLD 2004 GDP (current US$) (billions) 41,290.4 GNI per capita, Atlas method (current US$) 6,329 Life expectancy.
THE MIGRATION-TRADE LINK: IMMIGRANTS OR EMIGRANTS? Francisco Requena Guadalupe Serrano (Universitat de Valencia)
Slides prepared by Thomas Bishop Copyright © 2009 Pearson Addison-Wesley. All rights reserved. Chapter 2 World Trade: An Overview.
Chapter 2 World Trade: An Overview Yanan University Finance and Economics Dep. Aihong Qin.
Border effects  Border Effects  Border Effects: the extent to which internal trade exceeds international trade after controlling for the economic determinants.
An Evaluation of Alternative Methods of Estimating Capital Services
How trade barriers and national borders matter in trade flows between Canada and United States? AGRICULTURE, FOOD AND RESOURCE POLICY AGEC 630 Fortis Mathieu.
Does economic diplomacy work? Meta analysis of the effect of Economic Diplomacy on international flows Selwyn Moons Peter van Bergeijk
THE IMPACTS OF 9/11 ON CANADA-U.S. TRADE Steven Globerman and Paul Storer Western Washington University College of Business and Economics CUSLI, Cleveland,
HAOMING LIU JINLI ZENG KENAN ERTUNC GENETIC ABILITY AND INTERGENERATIONAL EARNINGS MOBILITY 1.
Collateral Damage: Exchange Restrictions and Trade Flows Shang-Jin Wei Zhiwei Zhang.
The changing geography of banking – Ancona, Sept. 23 rd 2006 Discussion of: “Cross border M&As in the financial sector: is banking different from insurance?”
1 Limiting Currency Volatility to Stimulate Goods Market Integration: A Price Based Approach by David Parsley and Shang-Jin Wei Vanderbilt University Brookings.
© The McGraw-Hill Companies, 2005 TECHNOLOGICAL PROGRESS AND GROWTH: THE GENERAL SOLOW MODEL Chapter 5 – second lecture Introducing Advanced Macroeconomics:
TRADING THE UNTRADEABLE A Gravity Model for Large-Scale Land Acquisitions (LSLAs) Marcello De Maria PhD Student, Department of Economics University of.
Does Trade Cause Growth? JEFFREY A. FRANKEL AND DAVID ROMER*
Geneva, May The demand and supply of international transport services: The relationships between trade, transport costs and.
IATRC Beijing Conference
Accounting for the Effect of Health on Economic Growth David N. Weil Proponent/Presenter Section.
Agricultural Policy Effects on Land Allocation Allen M. Featherstone Terry L. Kastens Kansas State University.
International Trade and Income Differences Michael E. Waugh.
Aid, policies and Growth
Law of Gravitation. Law of Gravity  Gravitational Force  All objects have mass and therefore will attract all other objects.  The size of the gravitational.
International Trade in Used Vehicles. Three Great Things About the Paper.
International portfolio diversification benefits: Cross-country evidence from a local perspective By J. Driessen and L. Laeven Presented by Michal Kolář,
4-1 MGMG 522 : Session #4 Choosing the Independent Variables and a Functional Form (Ch. 6 & 7)
Objectives Study causes of exporter’s success
What Unbiased Estimates for Time- Invariant Variables Reveal about the Effect of Distance on Foreign Direct Investment NOITS Stockholm University May 2007.
The wise use of dummies in gravity models: Export potentials in the Euromed region Juan M. Ruiz and Josep M. Vilarrubia Simposio de Análisis Económico.
Gravitating Towards Europe: The Effects of EU Membership on Foreign Direct Investment Randolph Bruno (UCL, Rodolfo De Benedetti Foundation and IZA-Bonn)
Pantelis Pantelidis, University of Piraeus Dimitrios Kyrkilis, University of Macedonia Efthymios Nikolopoulos, University of Macedonia February 2011 The.
Fixed Effects Model (FEM)
Multiple Regression Analysis and Model Building
The FTAA and the Location of FDI
Sven Blank (University of Tübingen)
Prepared by Lee Revere and John Large
Multiple Regression Analysis: Further Issues
Labor Productivity and Comparative Advantage: The Ricardian Model.
Chapter 7: The Normality Assumption and Inference with OLS
The Determinants of FDI Inflows to Greece
Regression and Categorical Predictors
Universal Law of Gravitation
Chapter 9 Dummy Variables Undergraduated Econometrics Page 1
Model and Hypothesis Table Explanation of Variables
Presentation transcript:

Objectives Understanding the impact of distance and economy size on trade using the gravity model Apply the gravity model for the cases of FDI, and migration See how people use the gravity model to evaluate economic policy issues 1 2 3

 Newton’s “Law of Universal Gravitation” (1687): The attractive force (F ij ) between i and j  M i, M j are the masses  D is distance between two objects  G is gravitational constant The Origin of the Gravity Equation MjMi D F

 Model many social interactions (migration, tourism, trade, FDI)  F ij is the flow from i to j  M’s are measure of economic mass  D is the distance Economists and Gravity

Estimation of the Gravity Equation  Take logs:

Overall explanatory power  R 2 between 0.65 and 0.95  Suggests using gravity as a benchmark for volume of trade.  Can then use gravity based benchmark to evaluate economic policy

The role of economic mass  Usually measured using GDP  Most theoretical explanations predict coefficient equal to one  Estimates often not significantly different from 1, but range is from 0.7 to 1.1

The role of distance  Distance usually measured using great circle distance based on latitude and longitude  Head (2000) averages results from 62 regressions in eight papers, for sample years ranging from 1928 to 1995  Average distance effect is 1.01  Doubling distance halves trade

Distance and trade costs  Trade costs:  Direct (transport)  Indirect (government policy ; language)  Is distance just capturing the effect of trade costs (acting as a proxy) or does it play an additional role?

Data on trade costs  IMF bilateral data of total exports from A (free on board) to imports of B (cost-insurance-freight)  Composition of trade depends on t.c.  National customs data for a few countries  Direct industry/shipping company info  Ocean shipping prices/air freight from trade journals (Hummels)  Quotes from shipping standard container from Baltimore (Venables)

Magnitude  Wide dispersion of trade costs  US 3.8% value of imports (1994)  Brazil 7.3%  Paraguay 13.3%  Unweighted (get rid of composition effect)  Median cif/fob ratio 1.28 (28% t.c.)  2 to 3 times higher than weighted

Empirical Results Shipping 40’ container ($000) Land locked dummy3.45 (4.75) 2.17 (2.94) Distance (000km) 0.38 (2.60) Dist. Sea0.19 (2.12) Dist. Land1.38 (4.66) R2R

Effect of distance on t.c.  Mean cost if not landlocked $4,620  Landlocked increases cost by $3,450  Overland 7 times more expensive than sea  For cif/fob ratios  Elasticity w.r.t distance 0.2 to 0.3  Common border reduces substantially  R 2 = 0.45

Distance and gravity  Distance explains around 45% variation in transport costs  Regressions of trade flows on both distance and t.c. still gives significant coefficient on distance (although magnitude lower)  Distance must be a proxy for both t.c. and other information costs.

Using gravity to test for border effects.  Home bias: preference towards home products;  Comparison between intranational trade and international trade;  The borderless world – “National borders have effectively disappeared”  Use gravity to test:  McCallum (1995) using data on trade flows between US and Canadian provinces (dummy=1 if in the same country)

Using gravity to test for border effects.  McCallum: Data referring to 1988 (before FTA Canada-USA was signed): Intra-national data flows only referred to Canada (exports from a province to other Canada provinces: DumCA=1); International: Exports from Canada provinces to USA states (DumCA=0)  Developments: addiction of data referring to 1993: intra-national data for both CA and USA. Another indicator=DumUSA=1 for trade between two USA states;  Dij is the distance between any two provinces or states;  Results

Empirical results lny i 1.21 (0.03) lny j 1.06 (0.03) lndist ij (0.06) DUMMY3.09 (0.13) R

Using gravity to test for border effects.  Data referring to 1988 (before FTA Canada-USA was signed): Intra-national data flows only referred to Canada (exports from a province to other Canada provinces: Dummy=1); International: Exports from Canada provinces to USA states (Dummy=0)  Data referring to 1993: intra-national data for both CA and USA  Dij is the distance between any two provinces or states;  Results

The importance of borders  1988 or 1993: Coefficient on cross-provincial trade is quite high (3.09 to 2.75). Exp(3.09)=22; Exp(2.75)=15.7  1988: Canada-Canada province trade approx. 22 times Canada-US state trade; 1993: reduced to 15,7  Border effects (all impediments to trade across borders)  Ontario’s shipments to British Columbia should be 0.6 times shipments to Washington (US) [Washington is richer]  BC receives 12.6 times more goods from Ontario than Washington  Border effect = 12.6/0.6 = 21  Fallen to 12 since FTA implemented

The importance of borders  Anderson and Wincoop (2003): border effects have an asymmetric effect on countries of different size. More precisely have a larger effect on small economies.  Example:  US is 10 times bigger than Canada (economic size)  Without frictions to trade, Canada exports 90% of its GDP to US and sells 10% internally; US exports 10% of GDP  Suppose border effects reduce trade of a factor of ½  => Canada exports 45% to US and sells internally 55%  Its internal trade has increased of a factor 5.5, cross-border has decreased by 0.5 => 5.5/0.5=11: internal trade has increased 11 times more than cross-border trade  =>US exports now 5% and sells internally 95%. Cross-state trade has increased only slightly more than 2 times cross-border trade

Alternative approach: taking into account of different prices in different countries  Anderson and Wincoop (2003):  Imposes restrictions on the parameters of M;  Inverse indicator: DUMMY=1 for international (cross-border) trade 0 for internal trade; No distinction between Canadian or US cross- border trade (under a following assumption);  Introduces 2 new variables: price terms of the two countries (whose difference has a meaning). The two variables can be: 1.Constructed from Price Indexes data; 2.Estimated as a function of trade costs, where trade costs are a function of distance and other factors (intercept). (N.B. If trade costs are symmetric, then there cannot be a distinction between Canadian and US trade) => this methodology is quite complicated, because it involves the estimation of a recursive model of multiple equations.

Alternative approach: taking into account of different prices in different countries  Anderson and Wincoop (2003): 3. Introduce fixed-effects: two dummies one for the origin country and another one for the destination country: Di=1 if i is the exporter, 0 otherwise; Dj=1 if j is the importer, 0 otherwise; The two dummies are both equal to 1 only for cross-border trade observations. This implies: D i =(1-  )lnP i and D j =(1-  )lnP j

Conclusions  Distance matters for trade  Consistent with both new trade theory and old trade theory  Theory has helped refine the gravity relationship  Gravity can be used to test other hypotheses even if we don’t know what drives gravity