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

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.


Issue Date:
2011
Publication Type:
Working or Discussion Paper
PURL Identifier:
http://purl.umn.edu/208113
Total Pages:
25
Series Statement:
11-01




 Record created 2017-04-01, last modified 2017-08-28

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