The Changing Incidence of Geography

TLDR

The study calculates bilateral trade‑cost incidence by exploiting neglected structural gravity model properties, disaggregating by commodity and region, and re‑aggregating for economic‑geography analysis. Sellers’ trade‑cost incidence in Canada’s provinces was on average five times higher than buyers’, fell over time with specialization, and this globalizing force reduced constructed home bias and boosted real GDP. JEL codes: F11, F14, R12.

Abstract

The incidence of bilateral trade costs is calculated here using neglected properties of the structural gravity model, disaggregated by commodity and region, and re-aggregated into forms useful for economic geography. For Canada's provinces, 1992–2003, sellers' incidence is on average some five times higher than buyers' incidence. Sellers' incidence falls over time due to specialization, despite constant gravity coefficients. This previously unrecognized globalizing force drives big reductions in “constructed home bias,” the disproportionate predicted share of local trade; and large but varying gains in real GDP. (JEL F11, F14, R12)