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Border Effects and the Gravity Equation: Consistent Methods for Estimation
Author(s) -
Feenstra Robert C.
Publication year - 2002
Publication title -
scottish journal of political economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.4
H-Index - 46
eISSN - 1467-9485
pISSN - 0036-9292
DOI - 10.1111/1467-9485.00244
Subject(s) - monopolistic competition , economics , estimation , gravity equation , econometrics , simple (philosophy) , measure (data warehouse) , bilateral trade , gravity model of trade , competition (biology) , border effect , microeconomics , computer science , international economics , monopoly , geography , ecology , philosophy , management , archaeology , epistemology , database , china , biology
The CES monopolistic competition model is an especially convenient way to derive the gravity equation, especially when we allow for transport costs and other trade barriers. In that case, we need to take account of the overall price indexes in each country. We review three methods to do so: using published data on price indexes; using the computational method of Anderson and van Wincoop; or using country fixed effects to measure the price indexes. The latter two methods are compared on the dataset dealing with trade between and within Canada and the US. The fixed effects method produces consistent estimates of the average border effect across countries, and is simple to implement, so it might be considered to be the preferred estimation method.