How large are the benefits of transportation infrastructure projects, and what explains these benefits? To shed new light on these questions, I collect archival data from colonial India and use it to estimate the impact of India’s vast railroad network. Guided by six predictions from a general equilibrium trade model, I find that railroads: (1) decreased trade costs and interregional price gaps; (2) increased interregional and international trade; (3) eliminated the responsiveness of local prices to local productivity shocks (but increased the transmission of these shocks between regions); (4) increased the level of real income (but harmed neighboring regions without railroad access); (5) decreased the volatility of real income; and that (6), a sufficient statistic for the effect of railroads on welfare in the model accounts for virtually all of the observed reduced-form impact of railroads on real income. I find similar results from an instrumental variable specification, no spurious effects from over 40,000 km of lines that were approved but never built, and tight bounds on the estimated impact of railroads. These results suggest that transportation infrastructure projects can improve welfare significantly,

2. Data: from COMTRADE to BACI 10 2.1. UN COMTRADE database: Coverage and limitations.................... 10

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What has driven trade booms and trade busts in the past and present? We derive a micro-founded measure of trade frictions from leading trade theories and use it to gauge the importance of bilateral trade costs in determining international trade flows. We construct a new balanced sample of bilateral trade flows for 130 country pairs across the Americas, Asia, Europe, and Oceania for the period from 1870 to 2000 and demonstrate an overriding role for declining trade costs in the pre-World War I trade boom. In contrast, for the post-World War II trade boom we identify changes in output as the dominant force. Finally,

This paper derives a micro-founded gravity equation in general equilibrium based on a translog demand system that allows for endogenous markups and rich substitution patterns across goods. In contrast to standard CES-based gravity equations, trade is more sensitive to trade costs if the exporting country only provides a small share of the destination country‟s imports. As a result, trade costs have a heterogeneous impact across country pairs, with some trade flows predicted to be zero. I test the translog gravity equation and find strong empirical support in its favor. In an application to the currency union effect, I find that a currency union is only associated with substantially higher bilateral trade if the exporting country provides a small share of the destination country‟s imports. For other pairs, the currency union effect is modest or indistinguishable from zero.

Geography, flat or not, creates special relationships between buyers and sellers who reside in the same neighborhoods, but Friedman turns this metaphor inside-out by using The World is Flat to warn us of the perils of a relationship-free world in which every economic transaction is contested globally. In his “flat ” world, your wages are set in Shanghai. In fact, most of the footloose relationship-free jobs in apparel and footwear and consumer electronics departed the United States several decades ago, and few U.S. workers today feel the force of Chinese and Indian competition, notwithstanding the alarming anecdotes about the outsourcing of intellectual services. Of course, standardization, mechanization, and computerization all work to increase the number of footloose tasks, but innovation and education work in the opposite direction, creating relationship-based activities—like the writing of this review. It may only be personal conceit, but I imagine there is a reason why the Journal of Economic Literature asked me to do this review.

2 Measuring international market openness with border effects. 9 2.1 The model and estimable equation...................... 11

The working papers published in the Series constitute work in progress circulated to stimulate discussion and critical comments. Views expressed represent exclusively the authors ’ own opinions and do not necessarily reflect those of the editors. Ruhr Economic Papers #83 Timo MitzeBibliografische Information der Deutschen Nationalbibliothek Die Deutsche Nationalbibliothek verzeichnet diese Publikation in

What are the origins of border effects on trade and why do borders continue to matter in periods of increasing economic integration? We explore the hypothesis that border effects emerged as a result of asymmetric economic integration in the unique historical setting of the multi-national Habsburg Empire prior to the First World War. While markets tended to integrate mainly due to improved infrastructure, ethno-linguistic networks had persistent trade diverting effects. We find that the political borders which separated the empire’s successor states after the First World War became visible in the economy from the mid-1880s onwards, already 25-30 years before the First World War. This effect of a ‘border before a border’ cannot be explained by factors such as administrative barriers, physical geography, changes in infrastructure or patterns of integration with neighbouring regions outside of the Habsburg customs and monetary union. However, controlling for the changing ethno-linguistic composition of the population across the regional capital cities of the empire does explain most of the estimated border effects.

www.cepr.org Available online at: www.cepr.org/pubs/dps/DP6796.asp www.ssrn.com/xxx/xxx/xxx WAS GERMANY EVER UNITED?