Chapter 1 Introduction and Summary of Conclusions

Abstract

Two fundamental reasons that account for the domestic bias of consumption are distance and borders. Distance proxies for unobservable trading costs, which include, among other things, transport and administrative costs. Distance is a powerful deterrent to international trade. This fact is illustrated by considering the situation of Bahrain and Qatar, Belgium and India, and Indonesia and Guyana, which are, respectively, the closest (55.5mi), the median (4,414.7mi), and the farthest (12,351.1mi) country pairs in a large sample of bilateral trade flows (see Chapter 2). For Bahrain and Qatar, distance is estimated to reduce the estimate of bilateral trade flows by 39%; for Belgium and India, the reduction is 58%; for Indonesia and Guyana, the reduction is 121% (it exceeds the value of bilateral transactions). The success of the gravity model in explaining bilateral trade flows is due, to no small measure, to distance. For example, the standard trade model of complete specialization, without trading costs, makes two strong predictions. The first is that a country will import goods from all other countries in the world and the second that bilateral trade flows are proportional to the income of the two countries. Both predictions are way off the mark. Countries import from a small fraction of the potential pool of exporters and incomes alone over-predict actual trade flows by a large margin.

Citation

Fratianni, M. (2006), "Chapter 1 Introduction and Summary of Conclusions", Fratianni, M. (Ed.) Regional Economic Integration (Research in Global Strategic Management, Vol. 12), Emerald Group Publishing Limited, Leeds, pp. 1-8. https://doi.org/10.1016/S1064-4857(06)12001-X