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Gravity Channels in Trade

Author

Listed:
  • Yulin Hou

    (Zhongnan University of Economics and Law, Wuhan, P.R. China)

  • Yun Wang

    (Barry University, Miami Shores, FL)

  • Hakan Yilmazkuday

    (Department of Economics, Florida International University)

Abstract
Gravity variables such as distance, adjacency, colony, free trade agreements or language are used to capture the effects of trade costs in empirical studies. By using actual data on trade costs, this paper decomposes the overall effects of such variables on trade into those through three gravity channels: duties/tariffs (DC), transportation-costs (TC), and dyadic-preferences (PC). As opposed to the existing literature where gravity variables act like supply shifters (through DC and TC), this paper empirically shows that they act like demand shifters (through PC). Regarding policy, it is implied that welfare-improving globalization cannot be achieved only through reductions in direct costs such as duties/tariffs or transportation costs; it is rather the globalization itself that should be promoted in order to shift the preferences of destination countries toward international products and thus reduce indirect trade costs. The results are further connected to several existing discussions in the literature, such as welfare gains from trade and the distance puzzle.

Suggested Citation

  • Yulin Hou & Yun Wang & Hakan Yilmazkuday, 2022. "Gravity Channels in Trade," Working Papers 2209, Florida International University, Department of Economics.
    • Handle: RePEc:fiu:wpaper:2209
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    References listed on IDEAS

    as
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    Cited by:

    1. Hakan Yilmazkuday, 2021. "Decomposing the Gains From Trade Through the Standard Gravity Variables," International Economic Journal, Taylor & Francis Journals, vol. 35(1), pages 13-45, January.
    2. Xu, Tao, 2019. "Economic freedom and bilateral direct investment," Economic Modelling, Elsevier, vol. 78(C), pages 172-179.

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    More about this item

    Keywords

    Gravity Variables; Dyadic Preferences; U.S. Imports;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

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