Decomposing the Gains from Trade through the Standard Gravity Variables

Hakan Yilmazkuday

No 2009, Working Papers from Florida International University, Department of Economics

Abstract: Using the implications of a trade model, this paper measures the gains from trade through the standard gravity variables. Theoretically, it is shown that such gains can be calculated by using the estimated coefficients of these variables in a gravity regression, together with the bilateral expenditure shares of countries investigated. Empirically, the results show that the total actual gains through all gravity variables in the world have increased from about 1% in 1950s to about 5% as of 2015 that can be decomposed as 3.5% through proximity and 1.5% through other gravity variables. Gains through free trade agreements (FTAs) have started dominating among these other variables starting from 1990s, following the Uruguay Round. Across countries, the total gains of OECD countries are about 1.5 times those of others, whereas the total gains of European countries are more than 10 times those of Pacific countries. Calculations based on the future potential gains from trade through policy-oriented gravity variables further suggest that there is room for an additional 0.8% or 0.4% of a welfare gain in the world through having free trade agreements or using common currencies, respectively.

Keywords: Welfare Gains from Trade; Potential Gains from Trade; Gravity Variables; Free Trade Agreements (search for similar items in EconPapers)
JEL-codes: F13 F14 F63 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2020-11
New Economics Papers: this item is included in nep-int
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https://economics.fiu.edu/research/pdfs/2020_working_papers/2009.pdf First version, 2020 (application/pdf)

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Journal Article: Decomposing the Gains From Trade Through the Standard Gravity Variables (2021)
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