Working Paper: CEPR ID: DP14473
Authors: Celine Carrere; Monika Mrzov; Peter Neary
Abstract: Gravity as both fact and theory is one of the great success stories of the modern study of international trade, and has featured prominently in policy debates such as that over Brexit. We first review the facts, noting the overwhelming evidence that trade tends to fall with distance. We then introduce some expository tools for understanding CES theories of gravity as a simple general-equilibrium system. Next, we point out some anomalies with the theory, including implausible predictions for bilateral trade balances. Finally, we sketch an approach based on subconvex gravity as a promising direction to resolving them.
Keywords: bilateral trade balances; brexit; elasticity of trade to distance; quantile regression; structural gravity and trade; subconvex demands
JEL Codes: F17; F14; F10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Distance (R12) | Trade Volumes (F14) |
| Distance (R12) | Trade Barriers (F14) |
| Brexit (F19) | Trade Volumes (F14) |
| Brexit (F19) | GDP (E20) |