Has Distance Died? : Evidence from a Panel Gravity Model

The estimated coefficient of distance on
the volume of trade is generally found to increase rather
than decrease through time using the traditional gravity
model of trade. This distance puzzle proved robust to
several ad hoc versions of the model using data for 1962-96
for a large sample of 130 countries. The introduction of an
augmented barrier to trade function removes the paradox,
yielding a decline in the estimate of the elasticity of
trade to distance of about 11 percent over the 35-year
period for the whole sample. However, the death of distance
is shown to be largely confined to bilateral trade between
rich countries, with poor countries becoming marginalized.