Geography, Trade and Currency Union
Centre for Economic Policy Research, 2001 - Comercio internacional - Modelos econométricos - 25 pages
This Paper reports on four basic results of tests of the standard gravity equation. First, geography can serve to reflect comparative advantage as well as transportation costs. Second, the effect of distance on bilateral trade is mostly a substitution effect between closer and more distant trade partners rather than a scale effect on total foreign trade. Third, special political relationships, such as free trade agreements, former colonial attachments, and currency union, do not produce any trade diversion in the aggregate, but increase trade with outsiders as well as among the parties to the relationship. Fourth, Rose’s surprisingly high estimate of the impact of currency union on trade stems partly from a selection bias, but even following a correction for this bias, the estimate remains high.
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2000 annual rate Absolute Latitudes aggregate foreign trade aggregate trade bilateral distances bilateral trade close trade coefficient of Currency Combined Currency Union Corruption country pairs Currency Union/Outsider Difference in Absolute differences in latitude Discussion Papers distance and remoteness distance on bilateral effects of distance effects on trade Ex-Colonial Relationship Ex-Common Colonizer five political variables Frankel and Rose free trade agreements Free Trade Area FTA/Outsider geography Glick and Rose gravity equations gravity model great-circle distances impact of currency latl log of bilateral Log product multilateral trade resistance Number of Observations Observations is 31,101 Panel Data political associations Political Union protectionist Regressand is log rest Robust standard errors Rose's data scale effects shared colonial past significant Strict Currency Union subscription substitution effects substitution or scale tests third countries trade barriers trade creation trade diversion trade partners trade with outsiders trade with third transportation costs Union in column union on trade Wincoop