Gravity Redux: Measuring International Trade Costs with Panel Data
Barriers to international trade are known to be large. But have they become smaller over time? Building on the gravity framework by Anderson and van Wincoop (2003) I derive an analytical solution for time varying multilateral resistance variables that can be related to observable trade data. This solution makes it possible to infer time varying bilateral trade costs directly from the model's gravity equation without imposing arbitrary trade cost functions. As an illustration, 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.