May 2001 | Stephen Redding and Anthony J. Venables
This paper estimates a structural model of economic geography using cross-country data on per capita income, bilateral trade, and the relative price of manufacturing goods. The study finds that over 70% of the variation in per capita income can be explained by the geography of access to markets and sources of supply of intermediate inputs. The results are robust to the inclusion of other geographical, social, and institutional characteristics. The estimated coefficients are consistent with plausible values for the structural parameters of the model. The paper also finds quantitatively important effects of distance, access to the coast, and openness on levels of per capita income. The methodology involves developing a theoretical trade and geography model to derive three key relationships for empirical study: a gravity-like relationship for bilateral trade flows, a zero profit condition for firms, and a price index for manufacturers. The empirical analysis is structured into several stages, including estimating the trade equation, constructing market and supplier access measures, and estimating the wage equation. The results are robust to the inclusion of various control variables, and the authors use instrumental variables estimation to test the key identifying assumption of the model. The paper concludes by discussing the implications of the findings for understanding international inequality and the role of economic geography in determining factor prices and income levels.This paper estimates a structural model of economic geography using cross-country data on per capita income, bilateral trade, and the relative price of manufacturing goods. The study finds that over 70% of the variation in per capita income can be explained by the geography of access to markets and sources of supply of intermediate inputs. The results are robust to the inclusion of other geographical, social, and institutional characteristics. The estimated coefficients are consistent with plausible values for the structural parameters of the model. The paper also finds quantitatively important effects of distance, access to the coast, and openness on levels of per capita income. The methodology involves developing a theoretical trade and geography model to derive three key relationships for empirical study: a gravity-like relationship for bilateral trade flows, a zero profit condition for firms, and a price index for manufacturers. The empirical analysis is structured into several stages, including estimating the trade equation, constructing market and supplier access measures, and estimating the wage equation. The results are robust to the inclusion of various control variables, and the authors use instrumental variables estimation to test the key identifying assumption of the model. The paper concludes by discussing the implications of the findings for understanding international inequality and the role of economic geography in determining factor prices and income levels.