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Trade, Gravity, and Aggregation

Author

Listed:
  • Holger Breinlich

    (University of Surrey)

  • Dennis Novy

    (University of Warwick)

  • J. M. C. Santos Silva

    (University of Surrey)

Abstract

Gravity equations are an important tool in empirical international trade research. We study to what extent sector-level parameters can be recovered from aggregate gravity equations estimated via Poisson pseudo maximum likelihood. We show that in the leading case where trade cost regressors do not vary at the sector level, estimates obtained with aggregate data have a clear interpretation as a weighted average of sectoral elasticities. Otherwise the estimates are biased, but researchers may possibly infer the direction of the bias. We illustrate our results by revisiting Baier and Bergstrand’s (2007) influential study of the effects of free trade agreements.

Suggested Citation

  • Holger Breinlich & Dennis Novy & J. M. C. Santos Silva, 2024. "Trade, Gravity, and Aggregation," The Review of Economics and Statistics, MIT Press, vol. 106(5), pages 1418-1426, September.
    • Handle: RePEc:tpr:restat:v:106:y:2024:i:5:p:1418-1426
    DOI: 10.1162/rest_a_01234
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    References listed on IDEAS

    as
    1. J. M. C. Santos Silva & Silvana Tenreyro, 2015. "Trading Partners and Trading Volumes: Implementing the Helpman–Melitz–Rubinstein Model Empirically," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 77(1), pages 93-105, February.
    2. Pritchett, Lant & Sethi, Geeta, 1994. "Tariff Rates, Tariff Revenue, and Tariff Reform: Some New Facts," The World Bank Economic Review, World Bank, vol. 8(1), pages 1-16, January.
    3. Elhanan Helpman & Marc Melitz & Yona Rubinstein, 2008. "Estimating Trade Flows: Trading Partners and Trading Volumes," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 123(2), pages 441-487.
    4. repec:hal:spmain:info:hdl:2441/nki2gcedn93280ns6fslbhdnm is not listed on IDEAS
    5. Baier, Scott L. & Bergstrand, Jeffrey H., 2007. "Do free trade agreements actually increase members' international trade?," Journal of International Economics, Elsevier, vol. 71(1), pages 72-95, March.
    6. Mary Amiti & Stephen J. Redding & David E. Weinstein, 2019. "The impact of the 2018 trade war on US prices and welfare," CentrePiece - The magazine for economic performance 553, Centre for Economic Performance, LSE.
    7. Bas, Maria & Mayer, Thierry & Thoenig, Mathias, 2017. "From micro to macro: Demand, supply, and heterogeneity in the trade elasticity," Journal of International Economics, Elsevier, vol. 108(C), pages 1-19.
    8. repec:hal:spmain:info:hdl:2441/2j87pv5ou185f980qgrpf9net0 is not listed on IDEAS
    9. Arthur Lewbel, 1992. "Aggregation with Log-Linear Models," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 59(3), pages 635-642.
    10. Cameron,A. Colin & Trivedi,Pravin K., 2013. "Regression Analysis of Count Data," Cambridge Books, Cambridge University Press, number 9781107014169, January.
    11. Pesaran, M. Hashem & Smith, Ron, 1995. "Estimating long-run relationships from dynamic heterogeneous panels," Journal of Econometrics, Elsevier, vol. 68(1), pages 79-113, July.
    12. Alexander Kukush & Hans Schneeweis & Roland Wolf, 2004. "Three estimators for the poisson regression model with measurement errors," Statistical Papers, Springer, vol. 45(3), pages 351-368, July.
    13. Gourieroux, Christian & Monfort, Alain & Trognon, Alain, 1984. "Pseudo Maximum Likelihood Methods: Applications to Poisson Models," Econometrica, Econometric Society, vol. 52(3), pages 701-720, May.
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    2. Yang, Xuebing, 2024. "Bulkiness of goods and the gravity of international trade: Differential impact of trade barriers," Research in Economics, Elsevier, vol. 78(4).

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    More about this item

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F15 - International Economics - - Trade - - - Economic Integration
    • F17 - International Economics - - Trade - - - Trade Forecasting and Simulation

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