Proposing a new measure of distance in the gravity setting: evidence from Latin America

Abstract

The gravity model is a workhorse tool that has been widely used in international trade. However, one empirical question that frequently arises is related to the conceptualization and measurement of an economic distance index. Our study proposes an index based on Multiple Factor Analysis. This technique summarizes information related to the geographical, cultural, political and economic variables that might affect international trade between countries. Estimates indicate that the signs of the load factors in the Multiple Factor Analysis are intuitively plausible, and panel data exercises give sensible robust outcomes.