Abstract
The structure of the International Trade Network (ITN), whose nodes and links represent world countries and their trade relations respectively, affects key economic processes worldwide, including globalization, economic integration, industrial production, and the propagation of shocks and instabilities. Characterizing the ITN via a simple yet accurate model is an open problem. The traditional Gravity Model successfully reproduces the volume of trade between connected countries, using macroeconomic properties such as GDP, geographic distance, and possibly other factors. However, it predicts a network with complete or homogeneous topology, thus failing to reproduce the highly heterogeneous structure of the ITN. On the other hand, recent maximum-entropy network models successfully reproduce the complex topology of the ITN, but provide no information about trade volumes. Here we integrate these two currently incompatible approaches via the introduction of an Enhanced Gravity Model (EGM) of trade. The EGM is the simplest model combining the Gravity Model with the network approach within a maximum-entropy framework. Via a unified and principled mechanism that is transparent enough to be generalized to any economic network, the EGM provides a new econometric framework wherein trade probabilities and trade volumes can be separately controlled by any combination of dyadic and country-specific macroeconomic variables. The model successfully reproduces both the global topology and the local link weights of the ITN, parsimoniously reconciling the conflicting approaches. It also indicates that the probability that any two countries trade a certain volume should follow a geometric or exponential distribution with an additional point mass at zero volume.
Highlights
The International Trade Network (ITN) is the complex network of trade relationships existing between pairs of countries in the world
These models have mainly focused on the volume of trade between countries, largely because the economic literature perceives trade volumes as being a priori more informative than the topology of the ITN; the striking heterogeneity of trade volumes observed between different pairs of countries is clearly not captured by a purely “binary” description where all connections are effectively given the same weight
In this paper we focus on the Gravity Model (GM) applied to the international trade network, our discussion applies to many other models of networks as well
Summary
The International Trade Network (ITN) is the complex network of trade relationships existing between pairs of countries in the world. The model can be generalized to any (economic) network and provides an explicit specification of the full probability distribution that a given pair of countries is connected by a certain volume of trade, fixing an otherwise arbitrary choice in previous approaches. This distribution is found to be either geometric (for discrete volumes) or exponential (for continuous volumes), with an additional point mass at zero volume. This feature, which is different from all previous specifications of international trade models, is shown to replicate both the local trade volumes and the global topology of the empirical ITN remarkably well
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
