Does Aid Cause Trade? Evidence from an Asymmetric Gravity Model

33 Pages Posted: 5 May 2012

See all articles by Simone Juhasz Silva

Simone Juhasz Silva

affiliation not provided to SSRN

Douglas Nelson

University of Nottingham - Leverhulme Centre for Research on Globalisation and Economic Policy (GEP)

Date Written: May 2012

Abstract

Anderson and vanWincoop developed what has become the standard framework for framing and interpreting empirical work using the gravity model. Their framework relies heavily on an assumption of symmetry among countries. For issues related to North‐South trade, this assumption is problematic. In this paper, we develop an asymmetric extension of the Anderson–vanWincoop framework appropriate to the analysis of North‐South trade, where Northern countries produce differentiated goods and Southern countries homogenous ones. In addition, we use an appropriately extended version of Baier and Bergtrand and Taylor linear expansion – thus permitting its estimation using (good old) OLS. The result is an empirical model that (i) is better suited to the analysis of North‐South trade, (ii) is easy to estimate and compute comparative statics, not requiring a customised NLS routine and, given the way the South is included, (iii) provides a simple explanation of zero trade flows between some country pairs, a fact still not fully explained in the literature. As an illustration of its use, we examine the empirical link between foreign aid and trade.

Suggested Citation

Silva, Simone Juhasz and Nelson, Douglas, Does Aid Cause Trade? Evidence from an Asymmetric Gravity Model (May 2012). The World Economy, Vol. 35, Issue 5, pp. 545-577, 2012, Available at SSRN: https://ssrn.com/abstract=2051316 or http://dx.doi.org/10.1111/j.1467-9701.2011.01431.x

Simone Juhasz Silva (Contact Author)

affiliation not provided to SSRN

No Address Available

Douglas Nelson

University of Nottingham - Leverhulme Centre for Research on Globalisation and Economic Policy (GEP) ( email )

University Park
Nottingham, NG7 2RD
United Kingdom

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