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International Trade without CES: Estimating Translog Gravity

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  • Novy, Dennis

    (University of Warwick)

Abstract

This paper derives a micro-founded gravity equation based on a translog demand system that allows for flexible substitution patterns across goods. In contrast to the standard CES-based gravity equation, translog gravity generates an endogenous trade cost elasticity. Trade is more sensitive to trade costs if the exporting country only provides a small share of the destination country’s imports. As a result, trade costs have a heterogeneous impact across country pairs, with some trade flows predicted to be zero. I test the translog gravity equation and find empirical evidence that is in many ways consistent with its predictions.

Suggested Citation

  • Novy, Dennis, 2012. "International Trade without CES: Estimating Translog Gravity," CAGE Online Working Paper Series 101, Competitive Advantage in the Global Economy (CAGE).
    • Handle: RePEc:cge:wacage:101
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    More about this item

    Keywords

    Translog; Gravity; Trade Costs; Distance; Trade Cost Elasticity; Import Share;
    All these keywords.

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F15 - International Economics - - Trade - - - Economic Integration

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