The Incidence of Gravity

The high trade costs inferred from gravity are rarely used in thewide class of trade models. Two related problems explain this omis-sion of a key explanatory variable. First, national seller and buyer re-sponses to trade costs depend on their incidence rather than on the fullcost. Second, the high dimensionality of bilateral trade costs requiresaggregation for most practical uses in interpretation or standard trademodeling. This paper provides an intuitive description of a resolutionto the aggregation and incidence problems. For each product, it is as ifeach province or country sells to a world market containing all buyersand buys from from that market containing all sellers, the incidenceof aggregated bilateral trade costs being divided between sellers andbuyers according to their location. Measures of incidence describedhere give intuitive insight into the consequences of geography, illus-trated with results from Anderson and Yotov (2008). The integrationof the incidence measures with standard general equilibrium structureopens the way to richer applied general equilibrium models and betterempirical work on the origins of comparative advantage....