An Empirical Analysis of the Impact of Trade Costs on Trade Flows and Welfare: Country Size and PTA Implications

  • Snorri Thomas Snorrason
Part of the Contributions to Economics book series (CE)


This chapter is concerned with an analysis of trade costs with respect to the country size classification developed in Chap. 3 and membership of trade blocs, based upon the E45 data set. First, trade costs are calculated from the gravity equation and the results displayed according to size of countries classification and trade bloc membership. Second, the elasticity of preference substitution is calculated according to size classification and trade bloc membership. Third and closing the chapter is an extensive counterfactual general equilibrium investigation of the impact of changes in the trade costs consequent upon size classification of countries and EU membership using alternative market structure assumptions of perfect and imperfect competition.


Gravity Model Size Classification Trade Cost Trade Flow Small Country 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


  1. Anderson, J. E., & van Wincoop, E. (2001, May 10–11). Borders, trade and welfare. Paper presented at the Brookings Trade Forum on Globalization: Issues & Implications.Google Scholar
  2. Anderson, J. E., & van Wincoop, E. (2003). Gravity with gravitas: A solution to the border puzzle. American Economic Review, 93(1), 170–192.CrossRefGoogle Scholar
  3. Anderson, J. E., & van Wincoop, E. (2004). Trade costs. Journal of Economic Literature, XLII, 691–751.CrossRefGoogle Scholar
  4. Anderson, J. E. (1979). A theoretical foundation for the gravity equation. American Economic Review, 69(1), 106–116.Google Scholar
  5. Armington, P. A. (1969). A theory of demand for products distinguished by place of production. IMF Staff Papers, 16, 159–178.CrossRefGoogle Scholar
  6. Arrow, K. J., Chenery, H. B., Minhaus, B., & Solow, P. M. (1961). Capital-labor substitution and economic efficiency. The Review of Economics and Statistics, 43(3), 225–250.CrossRefGoogle Scholar
  7. Baier, S. L., & Bergstrand, J. H. (2001). The growth of world trade: Tariffs, transport costs and income similarity. Journal of International Economics, 53, 1–27.CrossRefGoogle Scholar
  8. Bergstrand, J. H. (1985). The gravity equation in international trade: Some microeconomic foundations and empirical evidence. The Review of Economics and Statistics, 67(3), 474–481.CrossRefGoogle Scholar
  9. Bergstrand, J. H., Egger, P., & Larch, M. (2007). Gravity redux: structural estimation of gravity equations with asymmetric bilateral trade costs. Working Paper, Notre Dame University.Google Scholar
  10. Dixit, A., & Norman, V. (1980). Theory of international trade. Cambridge: Cambridge University Press.CrossRefGoogle Scholar
  11. Dixit, A. K., & Stiglitz, J. E. (1977). Monopolistic competition and optimum product diversity. American Economic Review, 67, 297–308.Google Scholar
  12. Eaton, J., & Kortum, S. (2002). Technology, geography, and trade. Econometrica, 70(5), 1741–1779.CrossRefGoogle Scholar
  13. Evans, C. L. (2001). Border effects and the availability of domestic products abroad. Working Paper, Federal Reserve Bank of New York.Google Scholar
  14. Evans, C. L. (2003). The economic significance of national border effects. American Economic Review, 93(4), 1291–1312.CrossRefGoogle Scholar
  15. Feenstra, R. C. (1994). New product varieties and the measurement of international prices. American Economic Review, 84, 157–177.Google Scholar
  16. Feenstra, R. C. (2004). Advanced international trade: Theory & evidence. Princeton: Princeton University Press.Google Scholar
  17. Helpman, E., & Krugman, P. R. (1985). Market structure & foreign trade. London: Harvester-Wheatsheaf.Google Scholar
  18. Hummels, D. (2001). Toward a geography of trade costs. Working Paper, Purdue University.Google Scholar
  19. Klenow, P. J., & Rodriguez-Clare, A. (1997). Quantifying variety gains from trade liberalization. Working Paper, Graduate School of Business, University of Chicago.Google Scholar
  20. Krugman, P. R. (1979). Increasing returns, monopolistic competition and international trade. Journal of International Economics, 9, 469–479.CrossRefGoogle Scholar
  21. Krugman, P. R. (1980). Scale economies, product differentiation and the pattern of trade. American Economic Review, 70, 950–959.Google Scholar
  22. Linnemann, H. (1966). An econometric study of international trade flows. Amsterdam: North-Holland.Google Scholar
  23. Takayama, A. (1974). Mathematical economics. New York: The Dryden Press.Google Scholar
  24. Tinbergen, J. (1962). Shaping the world economy. New York: Twentieth Century Fund.Google Scholar
  25. Varian, H. R. (1992). Microeconomic analysis (3rd ed.). New York: Norton.Google Scholar
  26. Whalley, J. (1985). Trade liberalization among world trading areas. Cambridge, MA: MIT Press.Google Scholar
  27. Whalley, J. (1986). Impacts of a 50 % tariff reduction in an eight-region global trade model. In T. N. Srinivasan & J. Whalley (Eds.), General equilibrium trade policy modeling. Cambridge, MA: MIT Press.Google Scholar

Copyright information

© Springer-Verlag Berlin Heidelberg 2012

Authors and Affiliations

  • Snorri Thomas Snorrason
    • 1
  1. 1.Management School Department of EconomicsLancaster UniversityLancasterUK

Personalised recommendations