The central claim in this paper is that by explicitly introducing costs of international trade (narrowly, transport costs but more broadly, tariffs, nontariff barriers and other trade costs), one can go far toward explaining a great number of the main empirical puzzles that international...

Using the gravity model, we find evidence that the EC affects trade flows. A pair of EC members trade with each other 48 percent more than two otherwise similarly-placed countries. We also find that bilateral exchange rate variability fell by half within Europe during the 1980s, and that this...