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Home and regional biases and border effects in Armington type models

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The authors discuss biases in preferences and their trade effects in terms of impacts on non-neutral trade flows motivated by recent literature on both home bias and the border effect, and assess the contribution of each form of bias to the set of possible trade effects using a calibrated model with 3 Canadian regions, the U.S., and the rest of the world using 2001 data.
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This article is published in Economic Modelling.The article was published on 2009-03-01 and is currently open access. It has received 21 citations till now. The article focuses on the topics: Gravity model of trade.

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The International Migration of Knowledge Workers: When is Brain Drain Beneficial?

TL;DR: In this article, the welfare effects of the emigration of workers who produce a public good (knowledge) were investigated, and it was shown that the remaining residents of a country can gain from emigration, even when tastes for knowledge goods exhibit a kind of "home bias."
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Gravity Approach for Modelling International Trade in South-Eastern Europe and the Commonwealth of Independent States: The Role of Geography, Policy and Institutions

TL;DR: In this article, an augmented gravity model is proposed and estimated for a reference group of 82 countries employing the Poisson and Tobit estimation techniques to identify channels for increasing international trade of the SEE and CIS.
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The Welfare Economics of “Buy Local”

TL;DR: In this paper, a theoretical model of how various aspects of the “buy local” movement influence social welfare and output across two regions is provided. But the model does not consider the effect of externalities.
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Consumers and the brain drain: Product and process design and the gains from emigration

TL;DR: The authors consider the welfare effects of skilled worker emigration in a context where skilled labor plays a role in product or process design and show that emigration can benefit the residents left behind, even when consumers' tastes exhibit a form of home bias.
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Regionalization, Changes in Home Bias, and the Growth of World Trade

TL;DR: In this paper, the authors used numerical modeling methods to quantitatively assess the impacts of changes in home bias within regions on the growth of world trade among major blocs over the last three decades.
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Gravity with Gravitas: A Solution to the Border Puzzle

TL;DR: This article showed that the gravity model usually estimated does not correspond to the theory behind it and showed that national borders reduce trade between the US and Canada by about 44% while reducing trade among other industrialized countries by about 30%.
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Time to build and aggregate fluctuations

TL;DR: In this article, a general equilibrium model is developed and fitted to U.S. quarterly data for the post-war period, with the assumption that more than one time period is required for the construction of new productive capital and the non-time-separable utility function that admits greater intertemporal substitution of leisure.
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Gravity with Gravitas: A Solution to the Border Puzzle

TL;DR: In this article, a method that consistently and efficiently estimates a theoretical gravity equation and correctly calculates the comparative statics of trade frictions was developed to solve the famous McCallum border puzzle.
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A Theory of Demand for Products Distinguished by Place of Production (Une théorie de la demande de produits différenciés d'après leur origine) (Una teoría de la demanda de productos distinguiéndolos según el lugar de producción)

TL;DR: In this article, Solow et al. present an approach for the analysis of the variation of a flux commercial particulier entre pays in the context of recherche.
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Q1. What are the contributions mentioned in the paper "Nber working paper series home and regional biases and border effects in armington type models" ?

The authors would like to thank James Davies, Randy Wigle, Edgar Cudmore, and Yongfu Chen for their helpful comments and suggestions. Financial support from a CN Post-doctoral Fellowships in Transportation Policy held by the second author also makes this paper possible and is greatly appreciated. The views expressed herein are those of the author ( s ) and do not necessarily reflect the views of the National Bureau of Economic Research. 

To remove home bias from these preferences in the CES case suggests allowing CES shareparameters to become uniform (0.5 for each of XD and XF in this case) and the elasticity of substitution to approach infinity so that XD and XF are perfect substitutes in preferences. 

The presence of biases inpreferences for country level goods generates a border effect of 69.59, biases in Canadian regions only36.29, the U.S. 2.23, and the ROW 0.63. 

Instead of directly setting share parameters to values which researchers assert will remove anyelement of trade or border effect in model generated results, the authors adopt an approach of first constructing a model parameterization consistent with the absence of such effects. 

The gravity model predicts that, on average combined, Canadian internal and international trade should be overwhelmingly North-South. 

The presence of biases in preferences over two other Canadian region goods has only asmall effect on the border effect, as does biases in preferences in both the U.S. and ROW. 

This suggests that regional biases also play a central role in the determination of border effects, since the border effect is transformed into a reverse border effect. 

Hillberry (2002) shows that the Canada-U.S. border effect varies across commodities and afterHome bias in trade literature is usually taken to refer to model features and parameterizationsreflected in bias in preferences in favor of home produced over foreign produced goods. 

He assumes linear demands for goods which are not based on utility maximizing behavior and uses the term home bias to justify additional linear demand based on the difference between world and domestic production. 

These results also suggest that the presence of the biases for different foreign country goods in allregions collectively reduces the border effect, among which biases in Canadian regions and the ROWhave almost no impacts while biases in the U.S. reduces the border effect. 

Anderson and van Wincoop (2003) relate their discussion of Armington and gravity models to the border effect, showing that McCallum’s regression misses relative price effects involving third countries as bilateral border effects are reduced. 

siα is the first-stage Armington share parameter, six is region s’sconsumption of goods supplied by country i; and sσ (=1/(1- sρ )) is the elasticity of substitution betweenhome and foreign goods in region s.Each of the five regions maximizes top level utility subject to the budget constraint. 

Anderson and van Wincoop (2004) provide a comprehensivereview of this issue and transportation costs for global trade are roughly estimated by them to be around20% of import values.