this paper what we know about foreign trade and in what ways our understanding has improved as a result of the last 20 years of research

: We use several different data sets to investigate the dependence of transport costs on geography and infrastructure. Poor infrastructure accounts for 40% of predicted transport costs for coastal countries and 60% for landlocked. Landlocked countries can substantially reduce their high transport costs through improvements in own and transit countries' infrastructure. Analysis of bilateral trade data confirms the importance of infrastructure and gives an estimate of the elasticity of trade flows with respect to the trade cost factor of around-3. This means that raising trade costs by 10 percentage points reduces trade volumes by more than 20%. A deterioration of infrastructure from the median to the 75 th percentile raises transport costs by 12% points and reduces traded volumes by 28%. Analysis of African trade flows indicates that their relatively low level is largely due to poor infrastructure. JEL number: F1, O1, O55 Keywords: transport costs, infrastructure, international trade...

Will the Internet redefine the "core" and the "periphery," creating a new geography, with neighborhoods connected not with streams and roads but with wires and microwave transmissions? An analogy to previous transportation and communications improvements is frequently made today: the transportation revolution of the 20 century permitted the deagglomeration of much physical production, and the Internet will now permit the deagglomeration of the intellectual and immaterial activities of the economy. But this analogy is faulty, and its historical reasoning inaccurate. In this paper, we first point out that at the end of the 20 Century most exchanges of physical goods take place within geographically defined neighborhoods. Previous rounds of infrastructure improvement always had a double effect, permitting decentralization of certain activities while actually reinforcing the attraction of cities for others. This is because all technologies of economic transactions increase the complexity and timeliness of interactions, making possible new forms of variety and differentiation of outputs. This is then reflected in more complex intermediate divisions of labor, or overall roundaboutness of the economy. Many of the transactions required by such an economy are dependent on what we call "handshake" interactions, not mere "conversational" interactions, which are the kind made feasible at a distance by the Internet. Hence, the Internet , all the while permitting the further locational deconcentration of certain routinized activities will also participate in reinforcing the need for urban concentration as the principal means to carry out "handshaking" in the complex, variety-based parts of the economy whose development it will encourage.

Efforts to estimate the effects of international trade on a country’s real income have been hampered by the failure to account for the endogeneity of trade. Frankel and Romer recently use a country’s geographic attributes – notably its distance from potential trading partners – to construct an instrument to identify the effects of trade on income in 1985. Using data from the pre-World War I, the interwar, and the post-war periods, we find that the main result of Frankel and Romer is confirmed throughout the whole century: countries that trade more as a proportion of their GDP have higher incomes even after controlling for the endogeneity of trade. We also find that the OLS estimate of trade’s effect on income is biased downwards in almost every sample year. However, this result is not robust to the inclusion of distance from equator (latitude). Acknowledgments: We wish to thank Phillip Swagel for generously providing data from the IMF’s Direction of Trade Statistics, Leandro Prados de la Escosura for providing GDP data, and William Congdon for research assistance. We also thank Jeffrey Frankel, Nina Pavcnik, Dani Rodrik, David Romer, and several referees for helpful comments. Terviö thanks the Yrjö Jahnsson Foundation and the Finnish Cultural Foundation for financial support.

international economics. His research on macroeconomics and international trade has

For 40 years, the gravity equation has been a workhorse for cross-country empirical analyses of international trade flows and – in particular – the effects of free trade agreements (FTAs) on trade flows. However, the gravity equation is subject to the same econometric critique as cross-industry studies of U.S. tariff and nontariff barriers and U.S. multilateral imports: trade policy is not exogenous. The potential endogeneity of FTA binary right-hand-side variables motivates developing a theory of FTA determination compatible with the theory of international trade flows. Allowing econometrically for the potential FTA variable’s endogeneity yields striking empirical results: the effect of FTAs on trade flows is quintupled.

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In 1993, Czechoslovakia experienced a two-step breakup. On January 1, the country disintegrated as a political union, while preserving an economic and monetary union. Then, the Czech–Slovak monetary union collapsed on February 8. This paper analyzes the economic background of the two breakups from the perspective of the optimum currency area literature. The main finding is that the Czech and Slovak economies were vulnerable to asymmetric economic shocks, such as those induced by the economic transition. In particular, the stability of Czechoslovakia was undermined by the low correlation of permanent output shocks, low labor mobility, and higher concentration of heavy and

Trade theories covering Preferential Trade Agreements (PTAs) are as diverse as the literature in search of their empirical support. To account for the model uncertainty that surrounds the validity of the competing PTA theories, we introduce Bayesian Model Averaging (BMA) to the PTA literature. BMA minimizes the sum of Type I and Type II error, the mean squared error, and generates predictive distributions with optimal predictive performance. Once model uncertainty is addressed as part of the empirical strategy, we report clear evidence of Trade Creation, Trade Diversion, and Open Bloc effects. After controlling for natural trading partner effects, Trade Creation is weaker – except for the EU. To calculate the actual effects of PTAs on trade flows we show that the analysis must be comprehensive: it must control for Trade Creation and Diversion as well as all possible PTAs. Several prominent control variables are also shown to be robustly related to Trade Creation; they relate to factor endowments and economic policy.

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