Unlocking New Methods to Estimate Country-specific Effects and Trade Elasticities with the Structural Gravity Model

Rebecca Freeman; Mario Larch; Angelos Theodorakopoulos; Yoto V. Yotov

Unlocking New Methods to Estimate Country-specific Effects and Trade Elasticities with the Structural Gravity Model

Rebecca Freeman, Mario Larch, Angelos Theodorakopoulos ^*, Yoto V. Yotov

^*Corresponding author for this work

Research output: Contribution to journal › Article › peer-review

Abstract

We propose new methods to identify the impact of country-specific characteristics, policies, and trade costs on bilateral trade flows within the structural gravity framework. We complement theory with a simple two-stage estimating procedure and offer proof of concept by quantifying the impact of country-specific research and development (R&D) expenditure on
trade. Our results suggest a positive relationship overall, but a larger impact of R&D on international (versus domestic) trade. Importantly, our methods deliver trade elasticity estimates without the need for price or tariff data, and we highlight this feature by obtaining aggregate and sectoral trade elasticity estimates, including for services.

Original language	English
Journal	Journal of Applied Econometrics
Publication status	Accepted/In press - 28 Feb 2025

Keywords

Structural gravity
Country-specific trade costs
Trade elasticity
Elasticity of substitution
Services
R&D and trade

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Unlocking New Methods to Estimate Country-specific Effects and Trade Elasticities with the Structural Gravity Model
Freeman, R. (Creator), Larch, M. (Creator), Theodorakopoulos , A. (Creator) & Yotov, Y. V. (Creator), 1 Jan 2025
DOI: 10.15456/jae.2025058.1704592316
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title = "Unlocking New Methods to Estimate Country-specific Effects and Trade Elasticities with the Structural Gravity Model",

abstract = "We propose new methods to identify the impact of country-specific characteristics, policies, and trade costs on bilateral trade flows within the structural gravity framework. We complement theory with a simple two-stage estimating procedure and offer proof of concept by quantifying the impact of country-specific research and development (R&D) expenditure ontrade. Our results suggest a positive relationship overall, but a larger impact of R&D on international (versus domestic) trade. Importantly, our methods deliver trade elasticity estimates without the need for price or tariff data, and we highlight this feature by obtaining aggregate and sectoral trade elasticity estimates, including for services. ",

keywords = "Structural gravity, Country-specific trade costs, Trade elasticity, Elasticity of substitution, Services, R&D and trade",

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AU - Freeman, Rebecca

AU - Larch, Mario

AU - Theodorakopoulos , Angelos

AU - Yotov, Yoto V.

PY - 2025/2/28

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N2 - We propose new methods to identify the impact of country-specific characteristics, policies, and trade costs on bilateral trade flows within the structural gravity framework. We complement theory with a simple two-stage estimating procedure and offer proof of concept by quantifying the impact of country-specific research and development (R&D) expenditure ontrade. Our results suggest a positive relationship overall, but a larger impact of R&D on international (versus domestic) trade. Importantly, our methods deliver trade elasticity estimates without the need for price or tariff data, and we highlight this feature by obtaining aggregate and sectoral trade elasticity estimates, including for services.

AB - We propose new methods to identify the impact of country-specific characteristics, policies, and trade costs on bilateral trade flows within the structural gravity framework. We complement theory with a simple two-stage estimating procedure and offer proof of concept by quantifying the impact of country-specific research and development (R&D) expenditure ontrade. Our results suggest a positive relationship overall, but a larger impact of R&D on international (versus domestic) trade. Importantly, our methods deliver trade elasticity estimates without the need for price or tariff data, and we highlight this feature by obtaining aggregate and sectoral trade elasticity estimates, including for services.

KW - Structural gravity

KW - Country-specific trade costs

KW - Trade elasticity

KW - Elasticity of substitution

KW - Services

KW - R&D and trade

M3 - Article

SN - 0883-7252

JO - Journal of Applied Econometrics

JF - Journal of Applied Econometrics

ER -

Unlocking New Methods to Estimate Country-specific Effects and Trade Elasticities with the Structural Gravity Model

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Unlocking New Methods to Estimate Country-specific Effects and Trade Elasticities with the Structural Gravity Model

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