The Gravity Model in International Trade. Advances and Applications - Edited by Peter A.G. Van Bergeijk and Steven Brakman

Abstract

The gravity model has been used extensively in the international trade literature over the past 50 years. This volume offers 11 papers, presented at a University of Groningen conference in October 2007, and written by authors who have made seminal contributions to the gravity model over the past decade or so. It is an enjoyable collection of research that takes the gravity model to new frontiers by examining its methodology, its assumptions and its applications. The gravity model was first applied by Tinbergen (1962) and Poyhonen (1963) who proposed that bilateral trade flows between two countries is positively related to their respective national incomes and negatively related to the bilateral distance between them. The estimable form of this equation leads to the core gravity model which has gained popularity as it yields robust estimates. However, until recently the gravity model was “an intellectual orphan, unconnected to the rich family of economic theory” (Anderson, 2010). Most of the papers in this anthology incorporate new theoretical foundations of the gravity model leading to more accurate estimation and interpretation of the spatial relations. The editors, in the introduction, present the gravity model’s history, microfoundations and empirical applications, and state that the aim of the book is to “take stock of recent advancements” on the theoretical and empirical side. Part I of the volume has four papers on the model’s methodology, Part II has three papers on the spatial aspects, and Part III has four papers that show the versatility of the gravity model by applying it to international environmental arrangements, diplomatic relations, financial integration caused by mergers and acquisitions, and economic performance. In Part I, Bergstrand and Egger develop a theoretical model that simultaneously estimates gravity equations of bilateral final goods trade, intermediate goods trade and foreign direct investment (FDI) flows. Their predicted theoretical propositions are empirically validated leading the authors to conclude that Ethier’s (1982) intermediateinputs approach is relevant in explaining actual patterns of bilateral intermediates outsourcing flows.Anderson extends the multilateral resistance terms in Anderson and van Wincoop (2003) by considering when seller’s and buyer’s incidence of trade costs is determined in an aggregate fashion whereby all shipments are made from and to a basket of commodities. Any researcher who has tried to estimate unbiased gravity-equation coefficients with multilateral-resistance terms has usually had to choose between Anderson and van Wincoop’s customized non-linear approach or the computationally easier fixed-effects