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Gravity Channels in Trade
Gravity variables such as distance, adjacency, colony, free trade agreements or language are used to capture the effects of trade costs in empirical studies. By using actual data on trade costs, this paper decomposes the overall effects of such variables on trade into those through three gravity channels: duties/tariffs (DC), transportation costs (TC), and dyadicpreferences (PC). When PC is ignored as is typical in existing studies in the literature, it is shown that nearly all gravity effects are due to distance, 29 percent through DC and 71 percent through TC. The tables turn as the ...