How far is it from Seattle to Vancouver? About 142 miles, according to Google maps. But a classic paper from about 15 years ago estimates the distance as 75,000 “economic miles”, meaning that the cost of transporting goods across the border is equivalent to the cost of adding an extra 75,000 miles to the trip. A subsequent paper estimates the economic distance from the United States to Japan as roughly 7 light years, raising the question of why we trade with Japan when it would be so much cheaper to trade with Alpha Centauri, a mere 4 light years down the road.
Now a new paper (well, new to me anyway; it’s a couple years old, but I’ve only just stumbled on it) by Yuri Gorodnichenko and Linda Tesar rains on the whole parade by arguing that all of these estimates are based on statistical illusions that arise when prices are more variable within one country than another—and there’s no clear way to correct for those illusions. The best Gorodnichenko and Tesar can conclude is that the border crossing between Seattle and Vancouver increases the economic distance by somewhere between 28 miles and 65,000,000 miles—and that we need a better way to approach this problem.