Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/36493
Authors: 
Rudolph, Stephan
Year of Publication: 
2009
Series/Report no.: 
Dresden discussion paper series in economics 11/09
Abstract: 
Gravity Equations are broadly used to estimate the impacts of trade impediments on trade flows. It is often stated that results are implausibly high. In theoretical foundations of the gravity equation, trade costs usually enter as icebergmelting-costs. This paper offers an alternative approach to model trade costs. From a microeconomic point of view, trade costs should depend on trade input prices and - which is new - the underlying trade volume. If trade costs are determined by the trade volume, and average trade costs are falling with the trade volume (e.g. due to economies of scale in the trade sector), empirical results from gravity equations are likely to be biased.
Subjects: 
gravity equation
trade costs
estimation bias
JEL: 
F10
C51
Document Type: 
Working Paper

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