Short run gravity

Abstract

Short run gravity is a model of bilateral export trade serviced by fixed bilateral capacities (marketing capital) along with labor that is frictionlessly allocated across destinations. Long run efficient capacity allocation yields long run gravity, equivalent to the standard structural gravity model. The estimated short run trade elasticity is about 1/4 the long run trade elasticity. Capacity reallocation raised world manufacturing trade 75% in the globalization era, 1988–2006 – a solution to the ‘missing globalization puzzle’. Counter-factual long run equilibrium allocation of marketing capital implies world real income gains ranging from over 2% in 1989 to under 1% in 2006.