Paper Talk: The Suez Canal and Trade Flows

This post is going to be about a paper written by, and discussed at length by, Professor James Feyrer (with whom I took Advanced Macroeconomics.)

Distance, Trade, and Income – The 1967 to 1975 Closing of the Suez Canal as a Natural Experiment

I really like the phrase ‘natural experiment.’ I think it gives credence to the fact that economics is happening all around us, and we just need to pay attention and pick up on the clues. This paper did exactly that! The Suez Canal closed exogenously for an eight year period in 1967, which drastically altered trade distances between major trading partner countries, providing a natural experiment on the relationships between trade distance and volume.

It was already established in the literature that trade volumes and trade distance are strongly negatively correlated. This paper shed light on the elasticity of that relationship. The paper found that the long-run elasticity of trade against sea distance was about 0.5. These results have relevance as technology advances and faster methods of traversing the seas are developed – trade volumes are sure to increase, and the elasticity may decrease as trade volumes become less subject to trade distances.

A random occurrence forty years ago laid the stage for a macroeconomic analysis today – pretty sweet, if I do say so myself.

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