Gravity models in international trade analysis: testing the country similarity theory 50 years

Abstract

The article assessed the potential use of gravity models to test the impact of various socio-geographical factors on international and inter-regional trade. The potential of gravitational modeling was estimated based on testing the theory of Linder’s Country similarity theory on recent trade data. This theory was one of the key theories of international trade in the post-war period. The classical gravity model of international trade can be used to test the change in the importance of the country similarity factor over a certain time period. The gravity model will demonstrate more significant results compared to its classical version (excluding the country similarity factor) in the case of a positive effect of the similarity factor on the volume of bilateral trade between countries. The analysis of recent trade data allowed us to assess the extent of change in the country similarity factor over the past 70 years. This period was accompanied by high growth in international trade, as well as the involvement of developing countries in the international division of labor. Vigorous market competition for the production of industrial goods led to the fact that manufacturers were forced to cut costs by moving their main production capacities to developing countries, which significantly differ from them in their level of economic development. The country similarity factor has lost its significance in this new system of international trade relations. As a result, at present the country similarity factor is not a key factor explaining the volume of trade relations between different countries.