Trade Costs and Economic Development

Indiana Working Paper No. 2011-01

30 Pages Posted: 21 Jan 2011 Last revised: 12 May 2014

See all articles by Francesco Marchionne

Francesco Marchionne

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy; Università Politecnica delle Marche - Department of Economics

Michele U. Fratianni

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy; Universita' Politecnica delle Marche

Date Written: January 1, 2011

Abstract

We test the hypothesis of the circular causality between trade costs and degree of economic development using data on Italian provinces. Using different methods to control for multilateral resistance, we apply a gravity equation to estimate sectoral exports to 188 countries over the period 1995-2004. Provincial trade costs are constructed as the sum of five province-specific elasticities, including distance, adjacency, and common money. We find that Italian provinces are heterogeneous with respect to trade costs. These costs are influenced by lagged provincial per capita income and industrial structure. In turn, trade costs influence future provincial per capita income. This two-way relationship between trade costs and income is broadly consistent with the cumulative causation process emphasized by the New Economic Geography.

Keywords: trade costs, heterogeneity, economic development, gravity equation

JEL Classification: F10, F14, O52, R12

Suggested Citation

Marchionne, Francesco and Fratianni, Michele, Trade Costs and Economic Development (January 1, 2011). Indiana Working Paper No. 2011-01. Available at SSRN: https://ssrn.com/abstract=1743653 or http://dx.doi.org/10.2139/ssrn.1743653

Francesco Marchionne (Contact Author)

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy ( email )

1309 East Tenth Street
Bloomington, IN 47405-1701
United States
01 812 855-3756 (Phone)

HOME PAGE: http://kelley.iu.edu/BEPP/Faculty/page14113.cfm?ID=47081

Università Politecnica delle Marche - Department of Economics ( email )

Piazzale Martelli, 8
Ancona, 60121
Italy
+39 071 2207120 (Phone)

Michele Fratianni

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy ( email )

Bloomington, IN 47405
United States
812-855-3360 (Phone)
812-855-3354 (Fax)

Universita' Politecnica delle Marche ( email )

Piazzale Martelli, 8
60121 Ancona
Italy
39-071-2207120 (Phone)

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