Gravity Channels in Trade

80 Pages Posted: 12 Sep 2016

See all articles by Yulin Hou

Yulin Hou

Florida International University (FIU) - Department of Economics

Yun Wang

Florida International University (FIU) - Department of Economics

Hakan Yilmazkuday

Florida International University (FIU) - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: September 10, 2016

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). When PC is ignored as is typical in existing studies in the literature, it is shown that nearly all gravity effects are due to distance, 29 percent through DC and 71 percent through TC. The tables turn as the additional channel of PC is introduced and shown to dominate other channels, with adjacency contributing about 45 percent, distance about 32 percent, colony about 14 percent, free trade agreements about 7 percent, and language about 2 percent. It is implied that gravity variables mainly capture the effects of demand shifters rather than supply shifters (as implied by the existing literature). The results are further connected to several existing discussions in the literature, such as welfare gains from trade and the distance puzzle.

Keywords: Gravity Variables, Dyadic Preferences, U.S. Imports

JEL Classification: F12, F14

Suggested Citation

Hou, Yulin and Wang, Yun and Yilmazkuday, Hakan, Gravity Channels in Trade (September 10, 2016). Available at SSRN: https://ssrn.com/abstract=2836996 or http://dx.doi.org/10.2139/ssrn.2836996

Yulin Hou

Florida International University (FIU) - Department of Economics ( email )

11200 SW 8th Street
Miami, FL 33199
United States

Yun Wang

Florida International University (FIU) - Department of Economics ( email )

Miami, FL 33199
United States

Hakan Yilmazkuday (Contact Author)

Florida International University (FIU) - Department of Economics ( email )

11200 SW 8th Street
Miami, FL 33199
United States

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