Does Gravity Matter in a Service Economy?

Abstract

This paper estimates gravity equations for bilateral services trade in a sample of 28 countries. It finds that the standard gravity variables of economic size and geographic proximity are significant factors in services trade. It also reveals positive effects of linguistic ties on services trade. There is evidence of a positive link between regional trade arrangements and services trade. Much of that effect appears to reflect the impact of bilateral goods trade on services trade. This implies that efforts to enhance goods trade—bilateral or multilateral—should lead to more services trade as well.