International Trade. Lecture 2: Gravity. Thomas Chaney. Sciences Po. Thomas Chaney (Sciences Po) International Trade 1 / 17

Transcription

1 International Trade Lecture 2: Gravity Thoma Chaney Science Po Thoma Chaney (Science Po) International Trade 1 / 17

2 Road map for thi cla Gravity equation: firt pa at empiric Gravity equation: theory guided empiric Thoma Chaney (Science Po) International Trade 2 / 17

3 Gravity equation Firt documented by Tinbergen (1962). Trade between country A and B, X t AB = l t (GDP t A )a (GDP t B )b dit g AB ln X t AB = ln l t + a ln GDP t A + b ln GDP t B + g ln dit AB Typical empirical etimate give a, b, g t 1. Typical R 2 80%. Thoma Chaney (Science Po) International Trade 3 / 17

4 Border effect McCallum (AER 1995) Trade between US State and Canadian province ln X ij = ln l + a ln GDP i + b ln GDP j + g ln dit ij + ddummy ij + # ij with DUMMY ij = 1ifi and j in Canada. Implauible finding: e d t 22 Thoma Chaney (Science Po) International Trade 4 / 17

5 Gravity with Gravita Anderon and van Wincoop (AER 2003) Theory grounded etimation of gravity. Tariff equivalent of US-Canada border about 50% (large but not implauible). Thoma Chaney (Science Po) International Trade 5 / 17

6 Gravity with Gravita Simple theoretical model: good differentiated by country of origin (Armington aumption) endowmend economy (may be relaxed). identical homothetic preference, approximated by CES. multiplicative trade cot (Samuelon iceberg cot) perfect competition Thoma Chaney (Science Po) International Trade 6 / 17

7 Gravity with Gravita Optimal conumption by j conumer given by: max q ij  i! q 1 1 ij.t.  p ij q ij = Y j i with 1theelaticityofubtitutionacrogood. Thoma Chaney (Science Po) International Trade 7 / 17

8 Gravity with Gravita Perfect competition ) p ij = t ij p i Bilateral export: X ij = p ij q ij Market clearing: Y i = Â j X ij Thoma Chaney (Science Po) International Trade 8 / 17

9 Gravity with Gravita Ioelatic demand: tij p i X ij = with P j = P j 1 Y j! 1 Â (t ij p i ) 1 1 i Thoma Chaney (Science Po) International Trade 9 / 17

10 Gravity with Gravita Propoition If trade cot are ymmetric (t ij = t ji ) then, X ij = Y iy j Y W with the price indice olution to, tij P i P j 1 Pj 1 1 tij = Â i, 8j. i P i Note: 1 X ij, Y i, Y j, Y W obervable 2 (t ij ) 1 can be etimated through OLS with fixed effect 3 Then P i can be recovered Thoma Chaney (Science Po) International Trade 10 / 17

11 Main prediction Propoition X ij = Y iy j Y W tij P i P j 1 Size matter: larger (richer) countrie import more and export more. Trade barrier matter: bilateral trade barrier (t ij large) reduce trade. Novel prediction: for given bilateral trade barrier, more "remote" countrie import (and export) le. Key ingredient: price indice depend on relative ize and relative trade barrier. ln X ij = ln Y W + ln Y i + ln Y j ( 1) ln t ij +( 1) ln (P i P j ) Thoma Chaney (Science Po) International Trade 11 / 17

12 Border effect Propoition i and j are in the ame country, k in another: t ij = d ij, t ik = d ik b X ij X ik = Y i Y j Y W Y i Y k Y W tij 1 P i P j tik P i P k 1 = Y j Y k dij 1 b 1 Pj d ik P k 1 Canada i a mall country that buy motly (expenive) foreign good. The US i a large country that buy motly (cheap) local good. P Ca > P US Canada trade more with itelf than the US doe, X 2( 1) Ca 0,Ca/X Ca 0,US PCa = > 1 X US 0,US/X US 0,Ca P US Thoma Chaney (Science Po) International Trade 12 / 17

13 Etimation trategy Propoition X ij = Y iy j Y W tij P i P j 1 Aume only ditance and border matter for trade cot, t ij = b (1 DUMMY ij ) ij Etimate the following equation, dit r ij ln X ij Y i Y j = k ( 1) r ln dit ij + (1 ) ln b ij (1 DUMMY ij ) ln Pi 1 ln Pj 1 + # ij.t. P 1 j = Â i r(1 ) i ditij b (1 )(1 DUMMY ij ) ij Pi 1, 8j Thoma Chaney (Science Po) International Trade 13 / 17

14 Note: alternative trategy Propoition Etimate [ t 1 ij = b# ij from, X ij = Y iy j Y W tij P i P j 1 Solve for the P i (bt) olution to, Pj 1 ln X ij Y i Y j = a + a i + a j + # ij = Â i Note: with bp i = ba i,poibletotet: i t [ ij 1 Pi 1, 8j P i (bt) = bp i Thoma Chaney (Science Po) International Trade 14 / 17

15 Reult ( 1) r.8, intead of 1.5 in McCallum. Border effect: b 1 US Can = 4.9 ) b US Can 1 = 8 < : 50% for = 5 20% for = 10 10% for = 20 Canada trade 10.7 time with itelf than with the US (McCallum: 22 time) US trade 2.24 time more with itelf than with Canada. Thoma Chaney (Science Po) International Trade 15 / 17

16 Gravity beyond trade Gravity hold for trade in aet, bond or equity (Porte and Rey 2005) Inv ij = l MktCap i MktCap j Dit ij Gravity hold within countrie (Combe, Lafourcade and Mayer 2005) Gravity hold for FDI (Ramondo 2008) Thoma Chaney (Science Po) International Trade 16 / 17

17 Gravity beyond ditance Other determinant of bilateral trade flow: Common currency Trade agreement Common language, religion, legal ytem Common border Colonial tie Social network Buine network...etc Thoma Chaney (Science Po) International Trade 17 / 17