Gravity Equation for Different Product Groups: A study at product level
Do homogeneous and heterogeneous goods response the same way to changes in income and different measures of distance? Running country-fixed-effect gravity equation for different product groups, I find that homogeneous goods are less responsive to changes in income than heterogeneous goods. I also find that export volume of all product types is significantly hindered by geographical distance between countries. However, exports of homogeneous goods are not affected by social distance measures such as common language and colonial relationship, while exports of heterogeneous goods significantly improve if trading parties speak the same official language and have colonial relationship. Fixed effect quantile estimation (Koenker 2004) with bootstrapped standard errors confirms the above finding for income and geographical distance. Regarding two social distance measures, common language and colonial relationship, median quantile (Tobit) estimation suggests that common language does not have impact on exports of any product type, while colonial relationship significantly influences export of heterogeneous goods. At higher levels of quantiles the impact of common language increases for all product types, and even strongest on exports of homogeneous goods. Colonial relationship loses its impact as being evaluated at 90th percentile.
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