Exports at current or constant USD prices in gravity model

[CARLOS ABREO]

Dear all.

I am working in a gravity model with a large number of observations (133 exporters and 133 importers countries from 2005 to 2018).

My dependant variable is bilateral exports from i to j. I got this data from the IMF databank and their values are in current USD, as it is usual in many papers. However, some referees in an economic journal told me that I must work with exports at constant values.

I have tried to get the bilateral exports at constant values from different databanks but it has not been possible. Another possibility is to deflate every flow through an export price index related to each country involved in the study, but it would be a hard and long job. Therefore, I have some questions for you:

1. Why many papers estimate its model with bilateral exports at current USD values and their results are fine although they do not include exports at constant prices?
2. In case I decided to estimate my model with bilateral exports at current values, how can I justify this?
3. The inclusion of a year dummy creates a similar effect to the deflation process over exports values?
4. There is any available databank where I can find bilateral exports at constant values?

Thank you in advance.

Kind regards.

Carlos.

[Andrew Musau]

You can get imports and exports at constant prices from the Penn World Table. The idea is that you want to account for differences in relative prices. The differences in estimates using current and constant prices may not be significant, which may explain why referees do not insist on using constant prices.

[CARLOS ABREO]

Andrew.
Thanks for your quick and helpful response.
Do you know if the inclusion of year dummies creates and effect similar to the deflation of current values? If the answer is negative, could you tell me why year dummies are commonly include in many estimation?

[Andrew Musau]

Maybe an example will help to illustrate relative prices. A can of beer bought in a grocery store costs about twice as much in Norway compared to Kenya (I know this from personal experience). Thus, it would seem that beer is more expensive in Norway. However, this is in nominal terms. Expressed as relative prices (taking into account the average wages in both countries), the opposite is true. The relative price in this instance is calculated by dividing the price of the beer can by the wage rate (price of labor). So, it reflects how many units of labor you need to buy the can of beer. Note that the local currency units cancel out when dividing and therefore you have a standardized measure. In cross-country economic analysis, you therefore want to use relative prices as these reflect the real prices of goods or services. Year dummies, on the other hand, control for variables that change over time but are constant across countries. These reflect aggregate trends, e.g., across virtually all countries, there has been a decline in economic activity resulting from the ongoing pandemic.

[CARLOS ABREO]

Dear Andrew.

Great examples to explain what I needed.

However, although you gave me a source to get exports data, that databank does not offer bilateral exports at constant prices, which is what I really need.

Therefore, I would like to know if do you know a databank that offers bilateral exports at constant prices? Additionally, which index do you recommended me to deflect exports at current prices and where can I get it?

Thanks.

[Andrew Musau]

You are correct, what you get is total exports without any disaggregation. No, sorry I have never dealt with bilateral flows, but you could search empirical studies on Google Scholar with the keywords "bilateral exports at constant prices" and see what data the authors of such studies use.

[CARLOS ABREO]

Thanks Andrew.