Trade Barriers And The Collapse Of World Trade During The Great Depression

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SouthernEconomic Journal 2001, 67(4), ollapsetheDepressionJakob B. Madsen*Using panel data estimates of export and import equations for 17 countries in the interwarperiod,this paperestimatesthe effects of increasingtariff and nontarifftradebarrierson worldwide tradeover the period 1929 to 1932. The estimatessuggest that real world tradecontractedapproximately14% because of declining income, 8% as a result of discretionaryincreases intariff rates, 5% owing to deflation-inducedtariff increases, and a further6% because of theimposition of nontariffbarriers.Allowing for feedback effects from trade barrierson incomeand prices, discretionaryimpositions of tradebarrierscontributedabout the same to the tradecollapse as the diminishingnominal income.1. IntroductionThe contraction in world trade during the first phase of the Great Depression stands outas the strongest adverse shock to international trade in modem history. From 1929 to 1932world import and export volume in the industrialized nations decreased about 30%. However,it is not well understood which factors were responsible for the collapse. The factors that havebeen highlighted in the literature are declining demand, escalating tariff and nontariff tradebarriers, increasing bilateral trade agreements, and international exchange rate policies. Theimportance attributed to each of these factors has often been controversial. Pollard (1962, p.200) for instance argues that for Britain the "fall in total foreign trade as a proportion of homeproduction was a part of a secular trend, and may well not have been caused by the tariff assuch." By contrast, Khan (1946, p. 246) claims that, within 12 to 18 months, UK nominalimports of manufactures from most of Europe and the United States were reduced by somethinglike 60% "as a result of the tariff." Similarly, Saint-Etienne (1984, p. 29) argues that "by themid-1930's, international trade had become, in large proportion, barter trade" as a result of thetariffs and nontariff barriers.Empirical studies have examined the effects of trade restrictions on incomes to explain thedeclining trade for individual countries. The studies of Crucini and Kahn (1996) and Irwin(1998) find that the tariffs were influential for the U.S. imports and exports. In his study ofnominal imports to the European countries, Friedman (1974) quantified the effects of tradebarriers on nominal imports, and ultimately income, by means of dummies in periods of significant tariffs and nontariff barriers. He found that trade restrictions had a significant impact* Departmentof Economics, University of WesternAustralia,NedlandsW. A. 6907, Australia.Presentaddress:Departmentof Economics and Finance,BrunelUniversity,Uxbridge,Middlesex,UB8 3PH United Kingdom.Comments and suggestions from two anonymousreferees and financial supportfrom the AustralianResearchCouncil are gratefullyacknowledged.Received November 1999; acceptedJune 2000.848

Trade Barriers and the Collapse of Trade849on tradein a few countries.However,as Friedmanhimself acknowledges,the weakness of thisapproachis that strong and weak forms of trade barriersare restrictedto impact equally onimports in the estimates. Coupled with the small sample problems that plagued his estimates,the trade-barrierdummieswere unlikely to effectively have capturedthe effects of tradebarrierson imports,which explains substantialvariationsof the estimatedeffects of the tariffs and thenontariffbarriersacross countries.The study of Eichengreenand Irwin (1995) is probablythemost extensive analysis of tradeflows in the interwarperiod.Using 561 cross-sectionalbilateraltrade flows over three periods (1928, 1935, and 1938) they estimate a gravity model of tradepatterns.They relate the value of bilateralflows to nationalincome, population,distance, contiguity, tradeand currencyblock indicators,and exchangerate variability,to examinethe effectson trade of trade and currencyblocks, and exchange rate variability.They observe a decliningmarginalpropensityto importand export duringthe Depression,which they attributeto quotasand other binding traderestrictions,but do not formally test their importance.This paper seeks to estimate the contributionof income, tariffs, and nontariffbarriersonworld tradeduringthe Depressionusing panel data for 17 countriesover the period from 1920to 1938. The panel data approachenables the assessmentof the influenceon tradeof nontariffbarriersfrom estimatesof importand exportfunctions,by using as an identifyingassumptionthatthe nontariffbarrierswere to some degree simultaneouslyimposed and relaxedacrossthe industrializednations duringthe interwarperiod. The estimatesand extensive evidence from the literaturesuggest that this identifyingassumptionis valid (section 3). In section 4 the changes inworld tradein the interwarperiodare decomposedinto income effects, tariffeffects, andnontariffbarriereffects. The tradeeffects of the tariffchanges are furthermoredecomposedinto deflation/inflation-inducedtariff changes and discretionarytariff-inducedchanges. Because a significantfractionof importdutieswere specific (Liepmann1938; Crucini1994), andthereforedenominatedin fixed nominalvalues, tariff rates were automaticallypushed up by declining importprices inthe first years of the Depression.Overall the decompositionshows that 41% of the collapse inworld tradefrom 1929 to 1932 was due to discretionaryescalationsof tradebarriers,and 59%as a result of falling nominalincome, assumingthat the decline in prices and outputwere independent of the increasingtrade barriers.However, as discussed in section 5, because nominalincome was influencedby tradebarriers,the discretionaryimpositionsof tradebarriershad stronger tradeeffects than suggestedby these figures.Section 6 concludesthe paper.2. Tariffs and the Pattern of World Trade in the Interwar PeriodBefore estimatingthe influenceon world tradeof tradebarriersand income, a casual graphical analysisof the world macrotariffrate and the patternof world tradeis undertaken.Figure 1displays the macro import tariff rates for the most importanttrading nations and the importweighted tariffrate for 22 countriesin the interwarperiod,subsequentlyreferredto as the worldtariff rate.' The macro tariff rates are estimatedas importduties divided by importvalue. Thefigure shows that the world macro tariff rate almost doubles from 1929 to 1932, a period thatwas associatedwith the two majorevents in tariffpolicy history.The first shock was the passageI The following 22 countriesare includedin the figure:Canada,the UnitedStates,Japan,Australia,New Zealand,Austria,Belgium, Denmark,Finland, France, Germany,Greece, Hungary,Ireland,Italy, the Netherlands,Norway, Portugal,Spain, Sweden, Switzerland,and the United Kingdom.

850Jakob B. 0tFigure 1. Macro tariff rates. Calculatedas tariff duties divided by imports.The world index is computedas the USDimport-weightedindex for the 17 countriesused in this study plus Austria,Greece, Hungary,Portugal,and Spain.of the Hawley-Smoot Tariff Act in 1930. The second shock was the passage the AbnormalImportation Act in November 1931 and the Import Duties Act in February 1932 by the BritishParliament (Friedman 1974, p. 26). These shocks led to widespread worldwide reactions accordingto Jones (1934) and Friedman (1974). In his detailed taxonomy of trade barriers, Jones (1934)finds that the introduction of the Hawley-Smoot Tariff Act of 1930 led to concerted worldwideretributions against U.S. exports and escalations of trade barriersthat were not specifically targetedat U.S. products. On the basis of detailed studies of major trading nations he concludes that theHawley-Smoot Tariff had "very definite effects upon the commercial policies of the principaltrading nations of the world and upon the general development of the principles of commercialpolicy throughout the world" (pp. 1-2). The Hawley-Smoot Tariff was an important catalyst forworldwide escalations of trade barriers because the United States, which was the greatest creditornation at that time, withdrew many of its international loans and did not make new loans available,and therefore forced deficit countries to lower their imports.Figure 2 shows the world nominal trade flows between trade blocks and nontrade blocksin the interwar period, where the trade flows are measured by exports. The estimates are basedon the 22 countries in Figure 1. The following trade/currency blocks are considered: The Sterlingblock, the Reichmark block, and the Gold block. This block classification follows the classification of Eichengreen and Irwin (1995), and the countries contained in each block are listed inthe notes to Figure 2.2 From 1920 to 1939, 66.6% of world trade was between non-trade blocks,2 Eichengreenand Irwin consider bothcurrencyand tradeblocks. Canada,for instance, is not includedin the Sterlingcurrencyblock, but is a memberof the Commonwealthtradeblock.

Trade Barriers and the Collapse of Trade851IndexMean 100180 -160-140 Trade Blocks120 -10080Non-Trade Blocks6040 igure 2. World trade among trade and nontrade blocks. The trade blocks considered are the Sterling block (Australia,New Zealand,Denmark,Finland,Ireland,Norway, Portugal,Sweden, and the United Kingdom),Reichmarkblock (Austria, Germany,Greece, and Hungary),and Gold block (Belgium, France,the Netherlands,and Switzerland).on average. The curves have been standardizedto have a mean of 100 over the whole period.The figure shows that the gain in world trade throughoutthe 1920s was lost within the firstfour years of the Depression, when nominal world trade declined more than 50%. The twocurves show significantcomovements between trade and nontradeblocks, which suggests thatchanges in country-specifictariffs and nontariffand tradebarrierswere not crucialdeterminantsfor the changes in trade flows in the interwarperiod. This visual impressionis consistent withEichengreen and Irwin's (1995) results that trade between trade and currencyblocks did notgain significantlyin importance,at the expense of othercountries,duringthe Depression.Kitsonand Solomou (1995) reporta similarfinding.It is also consistentwith the evidence of Woytinskyand Woytinsky (1955, p. 80) that the distributionof internationaltrade among continentsdidnot change over the period 1928 to 1938. Perhapsit was realized that countrieswould not gainmuch from country-specifictraderestrictions.Gardnerand Kimbrough(1990) demonstratethatcountrieshave little to gain from country-specifictariffsand thatall tradingpartnersareaffectedby country-specifictariffs, not only the nations that are targeted.3. Estimates of Imports and Exports in the Interwar PeriodThis section estimates import and export equationsusing pooled cross-section and timeseries data for 17 importantplayers in the world marketduring the interwarperiod, to disentangle the effects on world trade of income, tariffs and nontariffbarriers,and exchange ratevariability.3The panel data natureof the estimates not only overcomes the small sample prob3 The following 17 countries, for which export and import volumes are available over the whole interwar period, areincluded in the estimates: Canada, the United States, Japan, Australia, New Zealand, Belgium, Denmark, Finland, France,Germany, Ireland, Italy, Netherlands, Norway, Sweden, Switzerland, and the United Kingdom.

852Jakob B. Madsenlems that are associated with single countryestimates, which use annualdata, it also enables aquantificationof the effects on tradeof the imposition of nontariffbarriers.The following equations for export and import volume are estimated using annual dataover the period 1922 to 1939:Aqx - piex)Yo? Y,A(pdex CDi,ex y2Ayi y3A log(l tr,x) y4Ar2,xr TDt,exex(1)andAqim Xo XA(pi CDiim eimpi'im) X2Ayd i 1, 2 .17Xlog(l( ttr X4AOr2,m TDt"t 1922, 1923, .1939.(2)where qex is the log of exportvolume,pd,ex is the log of exportunit values of domesticproducersin U.S. dollars (USD), pw.ex is the log of competitors'prices in the export marketsin USD, ywis the log of trade-weightedreal GDP,qimis the log of importvolume,pd is the log of producerprices of domestic producersand is measuredas export unit values in USD, pw"imis the log ofimportunit values in USD, yd is the log of domestic real GDP,trex is the trade-weightedexportmacro tariff rate and is measuredin decimal points, trim is the tariff rate on imports and ismeasuredin decimal points, r2,xr' and (r2,mr are the monthly variances of the bilaterallytradeweighted exchange rates for exports and imports respectively, within each year, and e is adisturbanceterm. As in Figure 1, the macro tariff rates are measuredas importduties dividedby nominal imports.TD, is an Nx(T - 3) matrixof time dummies and CD, is an Nx(N - 1)matrix of country dummies, where T is the length of the time period and N is the numberofcountries.{ and [ are (T - 3) and (N - 1) vectors of fixed parameters.A one-periodlag of allnondeterministicvariablesare added to the estimates of the equations.The equationsare standard import and export equations (Goldstein and Khan 1985) augmentedwith tariffs and exchange rate variability.Exchange rate variabilityis included in the estimates to allow for thepossibility that increasingexchange rate uncertaintyduring the Depression adversely affectedtrade.The time dummies in Equations 1 and 2 are assumed to capturethe impact on trade ofnontariffbarrierssuch as quota systems, limitations on the use of importedraw materialsbydomestic producers,misused controls at frontiers,and regulationand rationingof foreign exchange. The panel data approachenables one to test statisticallythe presence on an omittedvariable that varies equally over time across countries. But why should we believe that anomitted variable is nontariffbarriersand thereforethat these barrierswere imposed with thesame force throughoutthe industrializedworld? There are two reasons as to why this shouldbe the case.First, nontariffbarrierson the export marketswere likely to be somewhatsimilarfor eachindividual country's export because of export diversification.This diversificationfor each individual country ensured that cross-countryvariationsin nontariffbarriers,to a large degree,averaged out, since varying country-specifictrade barrierswere not importantfor trade flowsas examined in the previous section. If the export function is correctlyspecified, then the timedummies will capturethe effects of an omitted variablethat follows the same time path acrossnations,namely nontariffbarriers.If the estimatedcoefficientsof the time dummiesin the importfunction follow the same time profile as the estimatesfrom the exportfunction,then it indicates

Trade Barriers and the Collapse of Trade853that tradebarrierpolicy was imposed and relaxed with approximatelythe same force and at thesame time across countries.Second, tariff rates were highly correlatedover time across countries and no individualcountry effects could be identified.4If individualcountriesraised their tariff rates at almost thesame rate and at almost at the same time, why should the timing and the force of enforcementof nontariff barriershave been any different?In fact, studies of individual countries suggestsimilar behavior across countries. In a detailed study of nontariffbarriers,Svenska Handelsbanken (1933, p. 4) found that nontariffbarrierswere imposed almost simultaneouslyacrosscountries during the first years of the Depression. Furthermore,as discussed in the previoussection, the passage of the tariff acts in the United States and United Kingdomwere importantcatalysts for concerted worldwide retributions.This evidence is also consistent with the classification of the imposition of nontariffbarriersfor 12 Europeancountriesby Friedman(1974,p. 75). He finds that almost all countrieshad significanttradebarriersbetween 1931 and 1935.Similarly, in his very detailed cross-countrycomparisonof tariffs, Liepmann(1938) notes thesimilarityin timing of the imposition of importquotas for the Europeannations. He notes that"from about the end of year 1931, however, quotas or exchange restriction. have becomethe most importantinstrumentsin commercialpolicy by numerousnew devises such as importpreventives, import monopolies for specific goods, preferentialagreements,import licences,etc." (p. 41). Referringto the Europeancountries,he furtherfound that "not only were dutiesfurtherincreased between 1932 and 1935, but numerousadditionalrestrictionswere imposedon imports" (p. 357). Finally, since the decline in various real commodity prices, which commenced in 1928 and gained momentumfrom 1929 to 1932, occurredalmost simultaneouslyforall commodities,we would expect tradebarriersto be imposed almost simultaneouslyfor commodity exportersand thereforesimultaneouslyaffecting all countries'exports.5It is importantto note that similarmagnitudeand the time profile of the change in nontariffbarriersacross countriesis not a prerequisitefor identificationof the effects of nontariffbarriers.It is only essential to find the average effect on world trade of the nontariffbarriers,and onlysome similarity in timing is requiredfor identification.Suppose that half of the countries increased their nontariffbarriersin one year, whereas the other half lowered them, so that theworld averageremainedunaltered.Then the estimatedcoefficient of the time dummy would beinsignificant and the estimate would correctly reveal that nontariffbarriersdid not influenceworld tradein this particularyear.The macro tariff rates in Equations 1 and 2 are separatedfrom the price competitivenessterms because the macro tariff rates are measuredex post and hence measuredas the averagetariff rate after substitutioneffects are borne out. An escalationof the tariffon a particularitem,for instance, leads to a substitutionaway from this item so that the macro tariff rate remainslittle affected by the tariff, whereas a fixed-weighttariffrate would show a significantincrease.Hence, a 1% change in macro tariff rates is not likely to have the same impact on trade as a1% change in the real exchange rate. Assuming that the average tariffrates are lineartransformations of the fixed-weight tariff rates, the influence of the tariff changes on tradeduringtheDepression can be uncovered.4Regressing first differences of macro tariff rates on time dummies and fixed-effect country dummies yielded highlysignificantestimatedcoefficients of the time dummies. However,all country dummies were insignificantat any conventional significancelevel (see also estimatesof Equation5 below). The estimatesare availablefrom the author.5 Warrenand Pearson(1937, Ch. 4) show that the path of world prices of individualcommoditiesalmost coincidedwiththe path of an overall index of world commodityprices, particularlyduringthe Depression.

854Jakob B. MadsenDataExport and importvolume is measuredas the total weight of importsand exports.Tradeweighted income is computed as real GDP using the average export shares to 26 differentdestinationsover the period 1923 to 1936 as weights, which covers the period for which themost detailed internationalsource of aggregate trade flows among countries is available, asdetailed in the data Appendix. The same export weights are used in the trade-weightedexportexchange rate variabilitiesand tariff rates on export markets.Bilateralimportweights are usedto compute the exchange rate variabilityon imports.The exchange rate variabilitiesare measured as the variance of trade-weightedexchange rates on a monthly basis within the year.Importcompetitivenessis measuredas the ratio of export unit values and importunit values.Exportprice competitivenessis calculatedas a multilateralindex. This index acknowledgesthe fact that exportersnot only compete with producersin the marketof destination,as in asimple bilateralindex, but also compete with third-marketproducerswho export to the samemarket.6For instance, Germanexportersselling to the Austrianmarketcompete not only withAustrianfirmsbut also with producersfrom France,Italy, Spain, and othercountriesthatexportto Austria.7Allowing for third-countryeffects, export competitivenessis calculatedaspd,ex/pw,ex pW'where pd,ex/pw,ex is an (N X T) matrixconsisting of export price competitivenessof country iat time t (i 1, . ., N, and t 1, . T), where N 26 and T 20. The log of the (i, t)element is therefore(pd ex - pitex) as used in Equation 1. P is an (N X T) matrix consistingof export unit values for country i at time t denominatedin USD and normalizedto have amean of one over the period 1920 to 1939. W is an (N X M) weighted matrix of N suppliersof exports to M markets:W {B '[(B 'cn)]' } {X[(Xcm)Cm]}where / is the Hadamarddivision,8cn is an (N X 1) vector of ones, and Cmis an (M X 1) vectorof ones. The X matrixis supplieri's export marketj:-XlIX12X21X22XNIXN2XIM. .X2M?.XNMand B is the X matrixwhere the main diagonal matrix consists of zeros. The elements Xij arecomputed as the average trade over the period 1923 to 1936. Unfortunately,data on turnoverin the tradeablesector, that is, the Xii elements, are not available. Instead,Xii is measuredasnominal GDP/2, which tracksthe turnoverof the U.S. tradeablesector in the U.S. marketquiteA more technicalnote on the computationof the export competitivenessindex and the data sources is availablefromthe author.7 The use of a multilateralindex standsin contrastto previousestimatesof exportprice elasticitiesin the interwarperiodwhere either bilateralindices of other ad hoc measuresof price competitivenesshave been used (see Orcutt 1950 forreferences).8 The Hadamarddivision divides each element of the matrix in the numeratorby each element of the matrix in thedenominator.6

Trade Barriers and the Collapse of Trade855accurately.The averagenominalGDP over the period 1927 to 1936 is used, becausedatabeyondthese periods are not availablefor some of the 26 countriesthat are included in the index.Export and importunit values are used as deflatorsin the competitivenessindices, mainlybecause they exclude the direct effects of tariffs. Other available deflators such as consumerprices, wholesale prices, and to some extent also the value-addedprice deflator,can be directlymisleading measures of competitivenessbecause they include import duties. If a country increases its import duties, then its consumer and wholesale prices would increase and henceindicate a loss in its importand export price competitiveness,ceteris paribus,even if its importcompetitiveness has improved. Consequently,the usage of wholesale and consumer prices asdeflators in a price competitiveness index would lead to severely downward-biasedestimatesof the price elasticities in foreign trade because of the negative correlationbetween the competitiveness variables and the error terms. This is particularlytrue in the interwarperiod inwhich tariffs fluctuatedsubstantially.Estimation MethodEquations 1 and 2 are estimatedusing pooled cross-section and time-series analysis. Thisapproachis useful because it enables the identificationof time dummies. The time dummiesare not only likely to capturethe effects of nontariffbarrierson trade, but are also likely toenable a better identificationof the income elasticities. Because income and nontariffbarriersare highly negatively correlated,as shown below, omission of the time dummies is likely tolead to biased estimates of income elasticities. Furthermore,the availabilityof 18 annual observations for each individualcountry, after lags and first differences are allowed for, renderssingle country estimates inefficient and excessively sensitive to outliers.The equations are estimated using a generalized instrumentalvariable estimator,whichassumes the following covariancematrix structure(Kmenta 1986, Ch. 12):E{e} 2?,i 1, 2, .,17,{eEjt i, ,i j,where Ei is the disturbanceterm for country i at time t, cr2 is its variance, and ,ij is thecontemporaneouscovariance of the disturbanceterms across countries. The error terms areassumed to be contemporaneouslycorrelatedacross countries, as the countries have been exposed to shocks that affected all countries simultaneously.Examples of such shocks were themonetaryshocks, which may have been transmittedacross the world by the gold standard,thecomovements of commodity prices and share prices across the world, and the volatility of theexchange rates in the beginning of the 1920s and 1930s. The cross-countryvariance heterogeneity correctionis undertakenas Bartletttests rejected the null hypothesis of varianceconstancy across countries,at the 1%level (see the tests in Table 1). C/2and uoiare estimatedusingthe feasible generalized least-squaresmethod, which is described in Kmenta (1986, Ch. 12).Instrumentsare used for the price competitivenessvariables.The instrumentsare listed in thenotes to Table 1.Estimation ResultsThe results of estimatingthe restrictedversions of Equations 1 and 2 are presentedin thefirst two columns of Table 1. The estimated coefficients of exchange rate variabilities,laggedincomes, lagged tariffs, and the lagged dependentvariableswere insignificantfor both exportsand imports,at the 5% level, and were consequentlyomittedfrom the estimates.The diagnostic

Table 1. Parameter Estimates of Import, Export, and Tariff EquationsImportsExportsAyWA(pdex-p W,ex)Ar,-I - Ptx) w(23, 260)DW(M)LearnerBP(5)BART(16)Est. period1.27 (25.8)-0.37 (25.0)-0.10 (10.1)-1.25 (13.2)0.40 (0.68)2.20 (3.66)-0.12 (0.26)4.58 (8.46)3.23 (6.57)2.76 (5.29)-0.95 (1.92)-2.86 (5.09)0.52 (0.78)-3.03 (4.82)0.57 (1.15)-1.61 (3.37)-0.85 (1.81)0.62(1.11)3.45 (5.35)5.64 (5.30)-5.69 (5.52)-4.68 (4.72)0.31 pdp w,im)d - ptin), p w,im)Alog(1 37R2(Buse)F(68, 221)Chow(19, 266)DW(M)LearnerBP(5)BART(16)Est. .0)0.981.690.712.0310.154.0056.591922-1939Absolute t-statisticsare given in parentheses.R2 Buse's R-squared.BART(16) Bartlett'stest for cross-countryvariance homogeneity, and ihomoscedasticity.DW(M) modifiedDurbin-Watsontest for first-orderserialcorrelationin fixed-effectpanel data models (see Bhargava,Franzini,and NarenPagan test for heteroscedasticityusing the stochastic explanatoryvariablesof the model as regressorsplus a constant term, on the basis of within-individuhypothesisof homoscedasticity.Chow(i,j) F-test for coefficient constancy with breakingpoint in 1930/1931, and is distributedas F(i, j) underthe null hycross-countrycoefficient constancy,and is distributedas F(i, j) under the null hypothesis of coefficient constancy. CDi fixed-effect dummy for countryvalue for the F-test for coefficient constancyacross countries. pi.A percentageimportprice change for the following countries:Canada,New Zealand,BeNorway and Sweden. Apn," percentageimportprice change for the following countries:Japan,Australia,France,Italy, Switzerlandand the United KingdA(p,P Ay,?T')),Ayw , Aqet , ApcPl, Ay', Alog(l try), Alog(l tr?e ). The following instruments are used for A(pd -p?m):pse ): A(pa? p?T,),AhO,Azh0,, where hOis the log of currencyin circulation.The constantterms in the importand tariffequationsare excluded because the time dummies hav

Trade Barriers and the Collapse of Trade857tests of the estimates in Table 1 are based on within individualordinaryleast squaresresidualsto remove fixed country effects. The diagnostictests do not indicate the presence of first-orderserial correlationand heteroscedasticity.The null hypothesisof coefficientconstancywith breaking point in 1930/1931 cannot be rejected at conventional significance levels, which suggeststhat the equationsare well specified. If the time dummies are excluded from the estimates,thenthe null hypothesis of coefficient constancy over the two periods is rejected for both exportsand imports,at the 5% level. In particular,the estimatedincome elasticity is substantiallyhigherin the pre-Depressionperiod than duringthe Depression when the time dummies are excludedfrom the estimates,which suggests that the estimatedincome elasticities are biased in estimatesthat exclude time dummies because income and nontariffbarriersare contemporaneouslycorrelated.This result highlights the importanceof including the time dummies in the estimates.The null hypothesis of cross-countrycoefficient constancy cannot be rejected at conventional significancelevels for exports.The null hypothesisis marginallyrejectedat the 1%levelfor imports. However, the classical F-test does not take into account that the likelihood ofrejecting the null hypothesis increases with the sample size and hence that the null hypothesisof cross-country coefficient homogeneity is likely to be rejected in the large sample that isconsideredhere. To cater for that problem,Leamer's(1978, p. 114) formulais used to calculatethe critical values of diffuse priors,which takes into accountthat the likelihood of rejectingthenull hypothesis grows with the sample size. The critical values are presentedfor each equationin Table 1. Because the F-statistics are well below the critical values calculatedfrom Leamer'sformula, the null hypothesis of cross-countrycoefficient homogeneity cannot be rejected atconventionalsignificancelevels. It follows that the coefficient estimates,which are restrictedtobe the same across countries,are unbiased.The estimated income elasticities in exports and imports are slightly above one, whichgive

trade flows over three periods (1928, 1935, and 1938) they estimate a gravity model of trade patterns. They relate the value of bilateral flows to national income, population, distance, con- tiguity, trade and currency block indicators, and exchange rate variability, to examine the effects

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