On the Measurement of Trade Costs: Direct vs. Indirect Approaches to Quantifying Standards and Technical Regulations

17 Pages Posted: 4 Apr 2012

See all articles by Natalie Chen

Natalie Chen

University of Warwick - Department of Economics; Centre for Economic Policy Research (CEPR)

Dennis Novy

University of Warwick - Department of Economics; Centre for Economic Policy Research (CEPR); Centre for Economic Performance (CEP); CESifo (Center for Economic Studies and Ifo Institute)

Date Written: March 2012

Abstract

In this article, we review the literature on the measurement of trade costs in international trade with a special emphasis on nontariff measures and in particular on standards and technical regulations. We distinguish 'direct' from 'indirect' approaches. The direct approach collects observable data or proxy variables on trade cost components which are then typically used as regressors in a gravity equation of trade. Instead, the indirect approach infers the extent of trade impediments from trade flows. It compares actual trade flows to the trade flows predicted by a hypothetical frictionless benchmark scenario based on a micro-founded trade model, attributing the deviation of actual from predicted trade flows to trade frictions. We argue that economists and policymakers can gain useful insights from both approaches.

Keywords: Gravity, Measurement, Nontariff Measures, Product Standards, Technical Barriers to Trade, Technical Regulations, Trade Costs

JEL Classification: F10, F15

Suggested Citation

Chen, Natalie and Novy, Dennis, On the Measurement of Trade Costs: Direct vs. Indirect Approaches to Quantifying Standards and Technical Regulations (March 2012). CEPR Discussion Paper No. DP8883, Available at SSRN: https://ssrn.com/abstract=2034101

Natalie Chen (Contact Author)

University of Warwick - Department of Economics ( email )

Coventry CV4 7AL
United Kingdom
+44 24 7652 8419 (Phone)
+44 24 7652 3032 (Fax)

Centre for Economic Policy Research (CEPR)

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United Kingdom

Dennis Novy

University of Warwick - Department of Economics ( email )

Coventry CV4 7AL
United Kingdom
+44 (0) 2476150046 (Phone)

HOME PAGE: http://www2.warwick.ac.uk/fac/soc/economics/staff/faculty/novy/

Centre for Economic Policy Research (CEPR) ( email )

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Centre for Economic Performance (CEP) ( email )

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CESifo (Center for Economic Studies and Ifo Institute)

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