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CEP discussion paper
Gravity Redux: Measuring International Trade Costs with Panel Data
Dennis Novy
January 2012
Paper No' CEPDP1114:
Full Paper (pdf)

JEL Classification: F10; F15

Tags: trade costs; gravity; multilateral resistance; ricardian trade; heterogeneous firms

Barriers to international trade are known to be large but due to data limitations it is hard to measure them directly for a large number of countries over many years. To address this problem I derive a micro-founded measure of bilateral trade costs that indirectly infers trade frictions from observable trade data. I show that this trade cost measure is consistent with a broad range of leading trade theories including Ricardian and heterogeneous firms models. In an application I show that U.S. trade costs with major trading partners declined on average by about 40 percent between 1970 and 2000, with Mexico and Canada experiencing the biggest reductions.