Augmented Gravity Model: An Empirical Application to Mercosur-European Union Trade Flows

Abstract

This paper applies the gravity trade model to assess Mercosur-European Union trade, and trade potential following the agreements reached recently between both trade blocs. The model is tested for a sample of 20 countries, the four formal members of Mercosur plus Chile and the fifteen members of the European Union. A panel data analysis is used to disentangle the time invariant country-specific effects and to capture the relationships between the relevant variables over time. We find that the fixed effect model is to be preferred to the random effects gravity model. Furthermore, a number of variables, namely, infrastructure, income differences and exchange rates added to the standard gravity equation, are found to be important determinants of bilateral trade flows.

Climate Change and Trade Opportunity in Climate Smart Goods in Asia: Application of Gravity Model

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A dynamic approach to road freight flows modeling in Spain

“…The combination of a panel data framework with the inclusion of lagged values of the dependent variable allows researchers to simultaneously account for unobserved heterogeneity and the likely dynamic nature of trade and transport relationships. De Benedictis and Vicarelli (2005) highlight that despite the explanatory potential of dynamic panel data models applied to the distribution component of transport demand, few studies have employed this type of specification when estimating the gravity equation Bun and Klaassen (2002), Nardis and Vicarelli (2003), Martínez-Zarzoso and Felicitas (2003) and Martínez-Zarzoso et al (2009a, b). To our knowledge, no study conducted thus far in the field of freight flows has exploited the advantages of a dynamic panel data model.…”

Economic Integration and Trade Protection: Policy Issues for South Asian Countries

“…Furthermore, Yang and Martinez‐Zarzoso () use a theoretically justified gravity model of trade, establish trade creation above trade‐diversion effects, and generally examine the impact of the ASEAN‐China Free Trade Agreement on exports. The study of Martinez‐Zarzoso and Nowak‐Lehmann () also demands attention as they try to assess the MERCOSUR‐EU trade and integration‐induced trade potential for MERCOSUR.…”

“…Furthermore, Yang and Martinez-Zarzoso (2014) use a theoretically justified gravity model of trade, establish trade creation above tradediversion effects, and generally examine the impact of the ASEAN-China Free Trade Agreement on exports. The study of Martinez-Zarzoso and Nowak-Lehmann (2003) also demands attention as they try to assess the MERCOSUR-EU trade and integration-induced trade potential for MERCOSUR. The basic gravity model was extended with the inclusion of a single regional dummy to capture the effect of the FTA on intraregional trade; another set of dummies was included in later works to capture the FTA's trade-diversion effects on nonmembers and found insignificant for both nonmember countries (Soloaga and Winters 2001) and members as well (Krueger 2001).…”