The gravity approach for modeling international trade patterns for economies in transition

Abstract

(JEL 010, FIO, C10, 050)

Migration Creation and Diversion in the European Union: Is Central and Eastern Europe a ‘Natural’ Member of the Single Market for Labour?

“…3 3 See, among others, Brulhart and Kelly (1999), Fidrmuc (1998), Glejser and Dramais (1969), Kreinin (1969), Paas (2000), Papazoglou et al. (2006), Sanz (2000), Spies and Marques (2009).…”

FDI in the post-EU accession Baltic Sea Region: A global or a regional concern?

“…This has, to the best of the authors' knowledge, not yet been done on BSR FDI data, and leads us to forward our next contribution to the literature on BSR FDI, which is to show that the close connection between trade and FDI discussed in the theoretical literature also has its validity for the BSR setting. Earlier gravity model analyses have stopped at studying the relationship between trade and distance, and done so by using OLS for their estimation (e.g., Paas, 2000;Paas and Tafenau, 2005). Here, we present a variant of the gravity model that also includes FDI.…”

“…Furthermore, in order to address the time trend inherited in the cross-section time series, a time variable is also included in the regression model. Formalizing the main gravity model used in this study, we obtain lnFDI ijt = β 0 + β 1 lnGDP it + β 2 lnGDP jt + β 3 lnGDPC it + β 4 lnGDPC jt + β 5 lnTrade ijt + β 6 lnDistance ijt + β 7 Time + β 8 D EU + β 9 D BSR + lnε ijt (1) where lnFDI = Total bilateral FDI stocks between home country i and host country j transformed into natural logarithms lnGDP = Gross Domestic Product transformed into natural logarithms lnGDPC = GDP per capita transformed into natural logarithms lnTrade = Total bilateral trade between home country i and host country j transformed into natural logarithms lnDistance = Distance between home country i and host country j transformed into ln ε = Error term i = Home country i j = Host country j t = time period t. As seen, the variables chosen for our FDI gravity model (1) follow the standard pattern for most analysis applications in trade and FDI research (e.g., Africano and Magalhães, 2005;Ledyaeva and Linden, 2006;Paas, 2000;Paas and Tafenau, 2005;Petri, 1994;Santos Silva and Tenreyro, 2003;Stone and Jeon, 1999). As the dependent variable, total FDI stocks are chosen as a measure for FDI due to better data availability for all countries and years in the sample.…”

“…Originally suggested in the 1960s by, e.g., Tinbergen (1962), the gravity model has since been used in International Trade studies for analyses of influences of various impeding factors on international trade flows (e.g., Bergstrand, 1985;Broadman, 2005;Flam and Nordström, 2010;Paas, 2000;Paas and Tafenau, 2005;Santos Silva and Tenreyro, 2003). Inspired by these developments in the trade analysis field, a number of researchers have also proposed and attempted to transfer the same analysis method to studies on FDI flows and stocks.…”

Democracy and Inter-Regional Trade Enhancement in Sub-Saharan Africa: Gravity Model

“…The presence of transport costs ensure that factor price equalization theory does not hold in the production of the same good in two or more countries. Studies have shown that trade models behave differently when transport cost and differences in demand across countries are taken into account (Paas 2000). As in previous studies, distance (D) is used as a proxy for transport costs since the distance between two countries is expected to determine the volume of trade between them.…”