Gravity models of networks: Integrating maximum-entropy and econometric approaches

Abstract

The World Trade Web (WTW) is the network of international trade relationships among world countries. Characterizing both the local link weights (observed trade volumes) and the global network structure (large-scale topology) of the WTW via a single model is still an open issue. While the traditional Gravity Model (GM) successfully replicates the observed trade volumes by employing macroeconomic properties such as GDP and geographic distance, it unfortunately predicts a fully connected network, returning a completely unrealistic topology of the WTW. To overcome this problem, two different classes of models have been introduced in econometrics and statistical physics. Econometric approaches interpret the traditional GM as the expected value of a probability distribution that can be chosen largely arbitrarily and tested against alternative distributions. Statistical physics approaches construct maximum-entropy probability distributions of (weighted) graphs from a chosen set of measurable, structural constraints and test distributions resulting from different constraints. Here we compare and integrate the two approaches by considering a class of maximum-entropy models that can incorporate macroeconomic properties used in standard econometric models. We find that the integrated approach achieves an overall better performance than the purely econometric one. These results suggest that the maximum-entropy construction can serve as a viable econometric framework wherein extensive and intensive margins can be separately controlled for, by combining topological constraints and dyadic macroeconomic variables.