Graduation Year

2017

Date of Submission

4-2017

Document Type

Campus Only Senior Thesis

Degree Name

Bachelor of Arts

Department

Economics

Reader 1

Cameron Shelton

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© 2017 Albert L Xu

Abstract

The gravity model of trade is the workhorse model for international trade. In its most basic form, it stipulates that bilateral trade flow between two countries is proportional to the countries’ Gross Domestic Product (GDP) and the distance between them. According to the gravity model, the elasticity of trade flows to distance, or the “distance effect,” has increased since the early 1970s, a confounding empirical result known as the “distance puzzle.” This paper investigates the distance effect more closely by decomposing it. More specifically, it aims to isolate the effects from culture, constructing measures of cultural distance and examining their effects on bilateral trade levels and the distance effect. The results show that cultural differences do not account for the distance puzzle. However, it also finds that cultural distance has both a substantial and statistically significant effect on bilateral trade.

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