The Gravity Equation in International Economics: Theory and Evidence

Abstract

The gravity model has been called the ' ... workhorse for empirical studies ... ' in international economics (Eichengreen and Irwin, 1998, p. 33). Selective breeding practices tend to improve the performance of racehorses, and so it has been with the gravity model. Many of the seminal papers that contributed to the current stature of the gravity model are cited in the six papers contained in this Special Issue. Each of these six papers focuses on a specific topic while often addressing common concerns with the existing specifications of the gravity model. Four of the papers address, in varying degrees, the issue raised by Grossman (1998) regarding the magnitude of the estimated distance coefficient in the gravity equation. Another draws attention to the sensitivity of results to the existence of outliers in the data. All of the papers attempt to resolve the specification issues that arise in their particular case. Indeed, addressing specification issues is at the heart of the selective process of determining which gravity models should be employed in future research.Robert Feenstra addresses a variety of issues related to the effect of borders on trade between the United States and Canada as well as within each country. Focusing on the price effect of borders, he compares three methods: using published price indexes; using the computation method of Anderson and van Wincoop (2001); and using country fixed effects. The latter two methods produce consistent estimates, but the user friendly nature of the country fixed effects approach give it an edge as the preferred approach.Don Wagner, Keith Head, and John Ries examine the effect of the presence of immigrants on trade for Canada at the provincial level. They use country fixed effects at the national level, which allows the variation in the stock of immigrants in each province to capture the effect on trade resulting from the presence of immigrants that came from the trading partner. They also attempt to capture the effect of a common language. Immigrants have a larger impact on imports than exports, which is consistent with the so called 'immigrant taste effect' argument.Prakash Loungani, Ashoka Mody, and Assaf Razin analyze the ability of the gravity model to explain financial flows as well as trade flows. Theory leads one to expect greater asset flows between countries that are farther apart, but prior work indicates that the sign on the distance variable is significantly negative, as it is when considering trade flows. The authors show that properly accounting

Import Inflows of Bangladesh: the Gravity Model Approach

“…Thus various combinations of macroeconomic variables, such as gross domestic product (GDP) and population with geographic distance, are significant predictors of trade potentials. Hence, gravity equations have been used extensively in the empirical literature on international trade (Havrylyshin and Pritchett, 1991;Frankel and Wei, 1993;Bayoumi and Eichengreen, 1997;Evenett and Hutchinson, 2002). Filippini (2003) used a gravity Equation model to analyze trade flows between East Asian industrializing countries (including China) and some developed countries in order to show the remarkable trade performance of East Asian countries.…”

The Macro Determinants of the Romanian Pharmaceutical Imports and Exports in 2001-2018 Period Using the Gravity Model

“…At micro level, the determinants of the imports could be the import demand and the export capacities, but at macro level, the determinants could be the GDP, the population and the geografical distance (Evenett and Hutchinson, 2002), the income of the importer (Martinez-Zarzoso and Nowak-Lehmann, 2003) or the GDP per capita and the common border (Achay, 2006). Cipollina and Salvataci proved in 2011 that EU membership matters and it has a positive impact on developing countries, while Baldwin and Taglioni proved in 2006 that being an EU member will boost the trade of a country by 25% and, in about the same time, Baier and Bergstrand showed that a FTA between two countries can double the trade in 15 years.…”

Understanding Egypt’s Main Agricultural Export Flows: A Gravity Model Perspective العوامل المفسرة لتدفق الصادرات الزراعیة المصریة الرئیسیة من خلال تموذج الجاذبیة

“…Thus various combinations of macroeconomic variables, such as GDP and population with geographic distance, are powerful predictors of trade potentials. Hence, gravity equations use these variables and have been used extensively in the empirical literature on international trade (Bayoumi & Eichengreen, 2007;Evenett & Hutchinson, 2002). The model is widely used in the empirical literature to evaluate the determinants of bilateral trade.…”