Standard Gravity Variables Research Articles

Exploring Oman’s International Tourism Determinants in a Gravity Modelling Framework

Abstract This research investigates Oman’s international tourism predictors within a coherent gravity modelling framework. International visitor arrival data for 2007 to 2015 involving Oman’s forty-eight main visitor origin countries are incorporated in the balanced panel estimation empirical phase that tests several gravity model specifications. The estimation procedure includes standard gravity variables and controls for several hypothesized influences. The findings provide strong evidence that the economic sizes of visitor recipient and origin countries, the distance between Oman and visitor origin countries, humidity, quality of accommodation, and common religion are statistically significant predictors. Surprisingly, while relevant, Oman’s cultural attractions (museums, forts, and castles) and the extent of human freedom are statistically insignificant. These findings are unique as they focus on the importance of factors determining Oman’s tourism within a cohesive and inclusive modelling framework. Policymakers can target the abovementioned variables to facilitate investments and propel tourism.

Decomposition of Extensive and Intensive Trade Margin Impacts of Chinas Agricultural OFDI

Economic theory indicates that some ambiguity in the relationship between outward foreign direct investment (OFDI)and trade. This paper estimate the impact of OFDI on the extensive and intensive agricultural import margins of at HS 6-digit commodity level over the sample period from 2012-2020 with the top ten trade partners. We find that standard gravity variables provide good explanatory power for bilateral trade on extensive margin. The empirical results show that the scale of OFDI has a positive impact on the total imports of agricultural products by diversifying product varieties rather than increasing the price of agricultural products, i.e. the impact of OFDI is concentrated exclusively on the extensive margin of China agricultural imports rather than intensive margin. Importantly, based on specific categories of agricultural products, our results suggest that OFDI almost works on food processing and animal products. Additionally, in order to further investigate the motivation of China`s agricultural OFDI, we construct expanded gravity model. The empirical results show that agricultural-related OFDI exhibits characteristics of seeking labor-intensive factors. Overall, our results support that OFDI promotes the diversification of China`s agricultural imports and contributes to the improvement of the welfare of Chinese residents.

The Determinants of Trade in Services With the Focus on Tourism

This paper estimates the gravity of bilateral trade in services at an aggregate level. The aim of the paper is to assess the effects of social and economic factors on the export of services. A large part of the trade-in services is directly or indirectly related to the tourism industry; therefore, the results of this research are mainly discussed from the perspective of the tourism industry. To achieve the paper's aim, we estimate the augmented gravity model on a sample of 5,359 trading partners from 2000 to 2018. We evaluate our model using the Poisson Pseudo Maximum Likelihood estimator. We include various fixed-effect dummies in our model to address the endogeneity issues. Our results show that standard gravity variables such as economic size and distance are significant for service trade. From the tourism industry perspective, it can be concluded that trade in tourism services is determined by the similarity in economic size, proximity, and common socio-economic factors such as common first language and shared religious beliefs. In contrast, common colonial history has no significant effects on service trade.

What is real and what is not in the global FDI network?

Macro statistics on foreign direct investment (FDI) are blurred by offshore financial centers with enormous inward and outward investment positions. This paper uses new data sources, both macro and micro, to estimate the global FDI network while disentangling real investment and phantom investment and allocating real investment to ultimate investor economies. We find that Phantom FDI into corporate shells with no substance and no real links to the local economy accounts for around 40 percent of global FDI. Ignoring Phantom FDI and allocating Real FDI to ultimate investors increases the explanatory power of standard gravity variables by around 25 percent.

Belt and Road Initiative Impact on Bilateral Trade Flows

This study aims to assess Belt and Road Initiative impact on bilateral trade between China and the partner countries. Thus, a Panel EGLS gravity model on data of 123 countries from 2012 to 2019 has been elaborated including standard gravity model variables as geographical and socio-cultural distance, local income. This model has been enhanced by introducing a dummy variable representing the membership of the partner country in the BRI and/or in WTO.
 Results show that standard gravity variables have their usual effects, a negative impact of distance while local incomes and sharing a common language have a positive effect. WTO membership has a positive impact too on bilateral trade between the considered countries. BRI also has a positive impact on bilateral trade between China and partner countries, hence its benefits for both. This positive impact is higher in BRI main road’s regions, Middle East, Europe, South and East Asia, while it lower in other regions as Latin America and North Africa.

The Impact of Technological Innovation on Manufacturing Exports of Pakistan

The aim of this article is to see if technological innovation has an impact on Pakistan’s manufacturing exports? For this purpose, Pseudo-Poison Maximum Likelihood (PPML) estimator with time and importer fixed effects has been applied to study adopted gravity model of manufacturing exports of Pakistan to its 65 major import partners over the period 2011-2018.The results show that technological innovation in both Pakistan and its importing partners positively and significantly affect Pakistan’s manufacturing exports. In addition, the outcomes of this study also confirm that the standard gravity variables are the important determinants of manufacturing exports. This article also adds to the existing literature by examining additional aspects of technological innovation. Second, this paper fills a research gap in Pakistan, as there has never been a study on the association between innovation and manufacturing exports. As a consequence, this study will open new avenues for future research.

Drivers of inflation convergence across countries: the role of standard gravity variables

AbstractUsing monthly headline inflation data covering 184 countries for the period between January 1971 and December 2020, this paper investigates the role of standard gravity variables on inflation convergence across country pairs. The convergence analysis by unit root tests is based on ten-year rolling windows to control for potential structural changes over time, whereas the corresponding results are connected to the standard gravity variables in the preceding year to investigate the drivers of inflation convergence and its speed. Regarding the existence of inflation convergence, empirical results show that having a common currency, a free trade agreement, proximity, a common border, or a colonial relationship between countries increases the probability of inflation convergence. Regarding the speed of inflation convergence, the very same gravity variables are shown to reduce the half-life of convergence. In both cases, the effects of having a common currency are shown to dominate those of other gravity variables.

Disaggregated gravity: Benchmark estimates and stylized facts from a new database

AbstractWe use the new International Trade and Production Database for Estimation to obtain benchmark gravity estimates for an unprecedented range of 170 industries. We document differences and similarities of standard gravity variables across four broad sectors: Agriculture, Mining and Energy, Manufacturing, and Services. We test the robustness of our main estimates against some key data and estimation approaches from the related literature. The findings from these experiments confirm the robustness of our main findings and reinforce some stylized facts, while highlighting possible caveats for gravity estimation in other contexts.

Drivers of Inflation Convergence across Countries: The Role of Standard Gravity Variables

Drivers of Inflation Convergence across Countries: The Role of Standard Gravity Variables

Decomposing the Gains From Trade Through the Standard Gravity Variables

ABSTRACT Using the implications of a trade model, this paper measures the gains from trade through the standard gravity variables. Theoretically, it is shown that such gains can be calculated by using the estimated coefficients of these variables in a gravity regression, together with the bilateral expenditure shares of countries investigated. Empirically, the results show that the total actual gains through all gravity variables in the world have increased from about in 1950s to about as of 2015 that can be decomposed as through proximity and through other gravity variables. Gains through free trade agreements (FTAs) have started dominating among these other variables starting from 1990s, following the Uruguay Round. Across countries, the total gains of OECD countries are about 1.5 times those of others, whereas the total gains of European countries are more than 10 times those of Pacific countries. Calculations based on the future potential gains from trade through policy-oriented gravity variables further suggest that there is room for an additional or of a welfare gain in the world through having free trade agreements or using common currencies, respectively.

Mars or Mercury redux: The geopolitics of bilateral trade agreements

AbstractWe analyse the role of economic and security considerations in bilateral trade agreements. We use the pre‐World War I period to test whether trade agreements are governed by standard gravity variables, or by instead—or in addition—geopolitical factors. While we like others find support for standard gravity variables, we also find that defence pacts boost the probability of trade agreements by as much as 20 percentage points. Our estimates imply that were the U.S. to alienate its geopolitical allies, the likelihood and benefits of successful bilateral agreements would fall significantly. Trade creation from an agreement between the U.S. and E.U. countries would decline by about 0.6 per cent of total U.S. exports.

Tools of the trade: trade flexibility with respect to margins and buyers

Access to highly disaggregated trade data allows for a more nuanced investigation of different margins of trade, and the factors known to influence them. In this paper, the number of importers and shipments to each importer is investigated together with the more traditional margins. Potential explanatory factors of these trade margins are combined from three literature strands in addition to the standard gravity variables; firm productivity, per-unit shipment costs and country-specific trade costs. The empirical results show, not unexpectedly, that insights from all these different strands of literature influence trade margins significantly. In particular, the number of shipments per importer increases with distance, degree of remoteness and per-shipment cost, and the number of importers decreases with the distance, remoteness and per-unit shipping cost. This indicates that increased trade costs make exporters economize in existing networks. Finally, disaggregating the data into three main product categories using Rauch’s classification, trade patterns are shown to vary by product group.

Decomposing the Gains from Trade through the Standard Gravity Variables

Using the implications of a trade model, this paper measures the gains from trade through the standard gravity variables. Theoretically, it is shown that such gains can be calculated by using the estimated coefficients of these variables in a gravity regression, together with the bilateral expenditure shares of countries investigated. Empirically, the results show that the total actual gains through all gravity variables in the world have increased from about 1% in 1950s to about 5% as of 2015 that can be decomposed as 3.5% through proximity and 1.5% through other gravity variables. Gains through free trade agreements (FTAs) have started dominating among these other variables starting from 1990s, following the Uruguay Round. Across countries, the total gains of OECD countries are about 1.5 times those of others, whereas the total gains of European countries are more than 10 times those of Pacific countries. Calculations based on the future potential gains from trade through policy-oriented gravity variables further suggest that there is room for an additional 0.8% or 0.4% of a welfare gain in the world through having free trade agreements or using common currencies, respectively.

Do Free Trade Agreements Increase Australian Trade: An Application of Poisson Pseudo Maximum Likelihood Estimator?

This article examines the effects of Australia's free trade agreements on trade creation and export diversion of the total as well as sectoral trade. The empirical analysis implemented through Poisson pseudo maximum likelihood estimator with time and country-specific effects. Results showed the standard gravity variables are highly significant with the expected signs. Overall, the trade creation effects were greater than intra-block export diversion effects of FTAs on Australia’s total trade. The trade creation effects of FTAs on the agricultural sector seems higher than the nonagricultural sector in Australia after deducting intra-block export diversion effects in the respective sectors.

What is Real and What is Not in the Global FDI Network?

Macro statistics on foreign direct investment (FDI) are blurred by offshore centers with enormous inward and outward investment positions. This paper uses several new data sources, both macro and micro, to estimate the global FDI network while disentangling real investment and phantom investment and allocating real investment to ultimate investor economies. We find that phantom investment into corporate shells with no substance and no real links to the local economy may account for almost 40 percent of global FDI. Ignoring phantom investment and allocating real investment to ultimate investors increases the explanatory power of standard gravity variables by around 25 percent.

What Is Real and What Is Not in the Global FDI Network?

Macro statistics on foreign direct investment (FDI) are blurred by offshore centers with enormous inward and outward investment positions. This paper uses several new data sources, both macro and micro, to estimate the global FDI network while disentangling real investment and phantom investment and allocating real investment to ultimate investor economies. We find that phantom investment into corporate shells with no substance and no real links to the local economy may account for almost 40 percent of global FDI. Ignoring phantom investment and allocating real investment to ultimate investors increases the explanatory power of standard gravity variables by around 25 percent.

Pakistan’s Global Trade Potential: A Gravity Model Approach

The international trade of Pakistan is highly concentrated on a few goods and markets. This study investigates macroeconomic behaviour of trade flow and explores potential trade markets for Pakistan using an augmented gravity model on a large panel of 47 cross-sections from 1980 to 2013. The result of standard gravity variables shows consistent findings with statistically significant t-statistics, whereas augmented variables reveal that relative price has a positive impact with lower price elasticity. The result of binary variables shows that Pakistan’s trade is more with countries having the same language, whereas lower trade is observed with bordering countries. The result of South Asian Free Trade Agreement (SAFTA) revealed ineffectiveness of regional integration on the creation of trade for Pakistan, whereas, bilateral free trade agreements (BFTAs) have created considerable trade. The finding of trade potential revealed exhausted potential with major trading partners and there is a need for greater trade diversification from exhausted to potential countries. It has higher untapped potential with Nepal, Iraq, India, Philippines and Jordan, respectively, in Asia, whereas European countries have the highest potential. The results concluded that Pakistan can diversify its trade from exhausted to potential countries through individual BFTAs and multilateral free trade agreements. South Asian countries should address their disputes and revisit SAFTA aiming to improve regional trade and growth.

Can trading partner cultural diversity explain trade?

The importance of culture on economic outcomes has been an element of ongoing research mainly in the disciplines outside of mainstream economics such as sociology and anthropology. From an economic perspective, there is a strong feeling among the corporate community that culture can be influential in business dealings. International trade is one area of business where cultural diversity can matter. This paper investigates the effect of trading partner cultural diversity on trade within the gravity model framework. The gravity model incorporates four measures to capture cultural diversity: religion, ethnicity, language and legal origin. Using data on New Zealand’s trade with Asia and employing the panel corrected standard errors estimation procedure, the empirical findings reveal that Asian diversity in religion and languages is positively correlated with New Zealand–Asia trade. The results reveal that the expected effects of standard gravity variables, and we conclude that the cultural diversity of trading partners positively influences international trade.

What is Real and What is Not in the Global FDI Network?

Macro statistics on foreign direct investment (FDI) are blurred by offshore centers with enormous inward and outward investment positions. This paper uses several new data sources, both macro and micro, to estimate the global FDI network while disentangling real investment and phantom investment and allocating real investment to ultimate investor economies. We find that phantom investment into corporate shells with no substance and no real links to the local economy may account for almost 40 percent of global FDI. Ignoring phantom investment and allocating real investment to ultimate investors increases the explanatory power of standard gravity variables by around 25 percent.

ASEAN-India Free Trade Agreement: Evaluating Trade Creation and Trade Diversion Effects

ABSTRACTThe present study attempts to provide insight into the trade creation and trade diversion effects of ASEAN-India Free Trade Agreement in goods, which came into force in 2010. The paper applies a theoretically consistent gravity model and uses empirically robust procedures such as ordinary least squares and pseudo-Poisson maximum likelihood in order to analyze the ex post effects of the agreement at an aggregate level. The results reveal that standard gravity variables are statistically significant and report expected signs, yet a reduction in export flows has been observed following the implementation of the free trade agreement, giving rise to pure trade diversion effects.