Gravity Model Of Trade Research Articles

Russia-EU gas game analysis: evidence from a new proposed trade model.

This paper represents a new proposed trade model of "Intercountries Trade Force (ITF)" which is inspired by Intermolecular Interaction Forces in chemical sciences, and has potential to compensate for the deficiencies of the gravity trade model proposed by Jan Tinbergen in 1962. The main differences between our new model and the earlier gravity trade theory are (i) there is a time-variant variable called the gravity index (GI) which means that the earlier gravity theory was treated as only a variable in our new proposed model and (ii) our new proposed trade model has a higher chance of adoption in the real trade world rather than the earlier gravity trade model which always needs to be expanded by scholars. In order to empirically test our new proposed trade model, we applied it in an empirical econometric model to analyze the Russian gas export to the EU member states, not explored earlier. Results revealed that our new trade proposed model adjusts with the empirical energy trade pattern.

Public export credit insurance in the Netherlands: An input–output approach

AbstractThis study assesses the contribution of the Dutch public export credit insurance facility (ECIF) to Dutch GDP and employment. Unlike previous studies concerning export credit insurance, which generally adopt the gravity model of trade, we adopt an input–output approach. The results show that the contribution of economic activity insured by the public ECIF to GDP averages 0.24% annually. This concerns value added generated both by exporters and by their domestic suppliers in the value chain. The contribution to employment shows an average of 0.27%, accumulating to 95,000 jobs (FTE) over 5 years. The estimated contribution of the public ECIF to the Dutch economy should be considered an upper boundary of its true contribution. Therefore, we examine the extent to which the above economic gains would be realised if the facility was unavailable using highly disaggregated trade data. The basic idea is that if certain products are only exported to certain destinations with the aid of the public ECIF, then this indicates a high degree of additionality. The inconclusiveness of our results underlines the difficulties in assessing the degree of additionality.

Effects of Foreign Aid on Income through International Trade

This article presents a review of recent studies that estimate the trade effects of foreign aid. It also provides new results obtained using panel data techniques to estimate the direct effects of aid on international trade accounting for countries’ participation in free trade agreements, and the indirect effects that aid exerts on income through trade. A structural gravity model of trade augmented with aid and free trade agreement variables is estimated for a cross-section of 33 donor countries and 125 recipient countries over the period 1995 to 2016. In a second step, the indirect effect of aid on income is estimated using a control function approach and instrumental variable techniques. The main results indicate that development aid has a robust direct effect on donor exports (the effect on recipient exports, however, is not robust). It also has an indirect positive effect on income levels in the recipient countries. The effects are heterogeneous and vary by region.

An empirical analysis of India’s trade in goods with BRICS

The purpose of this paper is to examine the empirically the trade flows between India and BRICS. The bilateral revealed comparative advantage index (BRCA) is computed for the assessment of comparative advantages of exports by India to BRICS countries for period 2001–2015. In addition, the trade complementarity index (TCI) between India and remaining BRICS countries is examined. The study has employed the gravity model of trade to find the role of selected variables on promoting India’s trade with BRICS countries. The findings of BRCA concluded that India holds a comparative advantage predominantly in agricultural and allied products followed by manufacturing and man-made products. BRCA analysis indicated minor structural changes between the years 2001 and 2015 for India’s export basket with BRICS countries. The higher TCI values suggested the scope of trade potential between India and BRICS countries. The results of panel gravity model for exports, imports and trade showed that most of the variables have the expected sign and are statistically significant. Results suggested that among the other variables, GDPs of trading countries and population can explain export, import and total trade flows. One of the major findings of the gravity analysis confirmed that distance acts negative, as a major constraint in increasing the trade flows of India with BRICS.

Trade Openness, Economic Growth and the Global Financial Crisis of 2007–2009 in Latin America

AbstractThis paper examines the relationship between bilateral trade openness and per capita gross domestic product for 15 Latin American countries during the financial crisis of 2008. It is employed an augmented gravity model of trade for the pre‐crisis, during‐crisis and post‐crisis periods (2004–2006, 2007–2009 and 2010–2012, respectively). Geographical characteristics and democracy rates of countries are used to instrument for average bilateral trade volumes. Different measures of trade openness are tested, and mixed results are identified. First, a slightly positive relationship between trade openness and growth is found when considering only Latin American countries. Second, after removing outliers and considering all importer countries, a negative relationship between the variables is found. © 2019 John Wiley & Sons, Ltd.

The effect of ICT on trade: Does product complexity matter?

We use a gravity model of trade to investigate the effect of internet use on aggregate trade flows. We apply a structural gravity model using up-to-date PPML estimation techniques to a sample of bilateral exports of 120 countries over the period 2000–2014. In contrast to previous studies, we segment countries according to their degree of product complexity and estimate the model for each segment. The results show that internet use increases trade, and the segmentation by product complexity is more sensitive to internet use than segmenting by level of income. The main results also indicate that countries trade more if similar levels of ICT use are coupled with similar degrees of product complexity in the trading countries.

Enhanced Gravity Model of Trade: Reconciling Macroeconomic and Network Models

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.

Looking Back to Look Forward: Setting Future Research Agenda for International Business in Textiles and Clothing Industry

Since its development by Tinbergen (1962), the gravity model of international trade has widely been applied to analyse the effect of various factors on trade relationships between countries. Past studies on trade gravity vary not only in the mix of model variables but also in how they have come into the analysis. This study reviews existing literature on bilateral trade with an aim to identify influential predictors such as changes of trade policy and national development strategy and highlight important yet understudied factors such as transport and logistics infrastructure, and sustainable development. To demonstrate the needs to examine these critical factors across industry sectors, the study presents the case of textiles and clothing (T&C) production and trade between China and its trading partners as an illustration. Through the literature review, it shows how the gravity model can be applied to address current issues in international trade arena such as the potential trade war between the US and China, China’s Belt and Road Initiative (BRI), and other important factors shaping global T&C trade. This study offers future research directions for analysis of global trade in the T&C industry and contributes to the wider literature of international business and trade.

What Determines Bilateral Trade Flows? Evidence from ECO Region

This study provides an analysis of Pakistan’s bilateral trade in Economic Corporation Organization (ECO) region. The main purpose of this study is to assess the determinants of bilateral trade flows using the gravity trade model. Panel least square regression has been applied over the period of 1995 to 2015. Two types of gravity models have been estimated: traditional gravity trade model and modified gravity trade model. The study has identified income, population, distance, adjacency, area, landlockedness, continent and terrorism as the main drivers of Pakistan’s bilateral trade flows with ECO countries. It is suggested that policies in Pakistan should focus on improving economic growth; offer incentives to Pakistani people to engage more in trade flows; improve transportation to trade with ECO countries; and take measures to eradicate terrorism.

Trade, Merchants, and the Lost Cities of the Bronze Age*

AbstractWe analyze a large data set of commercial records produced by Assyrian merchants in the nineteenth century BCE. Using the information from these records, we estimate a structural gravity model of long-distance trade in the Bronze Age. We use our structural gravity model to locate lost ancient cities. In many cases, our estimates confirm the conjectures of historians who follow different methodologies. In some instances, our estimates confirm one conjecture against others. We also structurally estimate ancient city sizes and offer evidence in support of the hypothesis that large cities tend to emerge at the intersections of natural transport routes, as dictated by topography. Finally, we document persistent patterns in the distribution of city sizes across four millennia, find a distance elasticity of trade in the Bronze Age close to modern estimates, and show suggestive evidence that the distribution of ancient city sizes, inferred from trade data, is well approximated by Zipf’s law.

The relevance of coordinated regional trade logistics for the implementation of regional free trade area of Africa

Background: Logistics will play a vital role in the process of boosting intra-regional trade among member states. Despite logistics integrating role in trade between countries, generally, African countries had faced with formidable challenges in logistics infrastructures development, and customs and border clearance. Objectives: The main objective of this article was to analyse the effect of trade logistics performance on the intra-regional trade of Africa. African countries’ logistics performance in international trade was measured using the World Bank Logistics Performance Index (LPI) and its components. The article emphasized examining the relevance of trade logistics for the implementation of the Continental Free Trade Area of Africa. Method: Descriptive analysis was undertaken to analyse African countries’ trade logistics performance, based on 2010–2018 LPI measures. The gravity model of international trade with Heckman maximum likelihood regression was used to explore the effect of trade logistics performance on the intra-regional trade of Africa. Results: African countries experience lowest average LPI score relative to its trading partner regions, particularly in terms of quality of trade- and transport-related infrastructures, customs, and border clearance, and competency and quality of logistics services. The study on gravity model estimates shows that improvement in any of LPI components, that is, infrastructures development, customs clearance, competence and logistics service quality, international shipments, tracking and tracing, and timeliness, can lead to significant growth on the trade between African countries. However, being geographically landlocked has a statistically significant negative effect on bilateral trade flow. Conclusion: Successful improvement in African countries’ trade logistics performance including logistics infrastructure, customs clearance, and logistics service quality will enhance trade between African countries. This, in turn, will have a paramount contribution to the effective implementation of the Continental Free Trade Area of Africa.

The tradability of services: Geographic concentration and trade costs

In this paper, we use a unique dataset on the distribution of output and demand across regions of the United States to construct measures of trade costs for 969 service and manufacturing industries. Our method is a natural extension of the gravity model of trade and identifies trade costs in the absence of trade data. As expected, our measures of trade costs are higher on average for service industries. However, there is considerable variation across industries within sectors. Using our measures of trade costs, we classify industries into tradable and non-tradable categories and find that tradable service industries account for about the same share of U.S. value added as tradable manufacturing industries. Our results also suggest that tradable services value added is unevenly distributed across geographical regions, that labor productivity and wages are higher on average for tradable industries, and that the potential welfare gains from trade liberalization in the service sector are sizable.

Forecasting Trade Potential Between China and the Five Central Asian Countries: Under the Background of Belt and Road Initiative

Under the background of the Belt and Road Initiative, this paper constructs a measurement equation for China’s exports to the five Central Asian countries based on the gravity model of international trade for the purpose of forecasting China’s future export growth potential. This paper selects China’s GDP, trading partners’ GDP, geographical distance, borders, railway freight volume, population growth rate and WTO as explanatory variables, based on what we construct multiple measurement equations. We use panel data from 2010 to 2017 to perform multiple regression analysis under the random effects model. We find that the model using China’s GDP, trading partners’ GDP, geographical distance, and borders as explanatory variables has a higher degree of fitness and each key explanatory variable is significant. Basing on the obtained measurement equation and the World Bank’s forecast of the economic growth of various countries, we forecast that China’s exports to the five Central Asian countries can maintain stable growth in the short term. By 2022, China’s total exports to the five Central Asian countries will reach 2,353,510.82 million USD which will be 1.09 times that of 2017.

The impact of the global financial crisis on Moroccan exports: a gravity model approach

PurposeThe purpose of this paper is to examine the impact of the global financial crisis (GFC) on Morocco’s export performance employing a gravity model framework.Design/methodology/approachThe authors investigate trade flows between Morocco and its 18 major trading partners from 2001 to 2015. The authors employ a trade gravity model using a first-order Taylor approximation of multilateral resistance terms and estimate by OLS and PPML.FindingsMorocco’s export performance was affected by theGFC. The authors find evidence that the fall in aggregate demand from Morocco’s trading partners, particularly in Europe, led to a fall in its exports. The authors also find that Morocco’s exports are positively correlated with the market size of its partner but negatively associated with distance.Originality/valueThis study contributes to the literature in two distinct ways. First, it examines variables affecting export performance in one of the emerging markets in the Middle East and North Africa region. Second, it assesses empirically whether there is a relationship between theGFCand the decline in Moroccan exports. The study also provides a number of important implications for policy makers and academics.

Trade Impacts of South Asian Free Trade Agreements in Sri Lanka

This article aims to examine the trade effects of the South Asian Free Trade Agreement (SAFTA) with a focus on Sri Lanka, by applying a gravity trade model. The study targets the following three FTAs: the SAFTA, the India–Sri Lanka Free Trade Agreement (ISFTA), and the Pakistan–Sri Lanka Free Trade Agreement (PSFTA). The outcomes of the gravity trade model estimation suggested that the trade creation effects were identified in the ISFTA, while those were not verified in the SAFTA and that the PSFTA had the trade creation effects only on the Sri Lankan imports. Those results seem to reflect the differentials in the preferential tariff rates. In particular, ISFTA could have the predominant positive effects on Sri Lankan trade flows due to its lowest preferential tariff rates, and thus the SAFTA effect might be crowded out at the current stage of Sri Lankan trade. JEL: F13, F14, O53

Somatic distance, trust and trade

AbstractSomatic distance, or differences in physical appearance, proves to be extremely important in the gravity model of bilateral trade in conformity with results in other areas of economics and outside in the social sciences. This is also true independently of survey evidence about bilateral trust. These findings are obtained in a sample of the 15 members of the European Economic Area in 1996. Robustness tests also show that somatic distance, as well as co‐ancestry, has a more reliable influence on bilateral trade than the other customary cultural variables. The article finally discusses the interpretation and breadth of application of these results.

Pollution haven hypothesis of domestic trade in China: A perspective of SO2 emissions

Domestic trade flourishes with economic development and the spatial separation of production and consumption. Therefore, the prosperity of trade is accompanied by the transfer of pollution from the demand side to the supply side, which could potentially worsen the environmental quality of the supply side. Despite a large number of studies on the pollution haven hypothesis in international trade, little attention has been paid to testing the hypothesis in domestic trade. Here, combining a multiregional input–output analysis and a gravity model of trade in China, we provide an empirical test to address this problem for the first time. We also assess the factors affecting the SO2 emissions embodied in trade, including population, economic development, coal consumption, distance, and environmental regulations. We found that domestic trade contributed approximate one third of the total SO2 emissions in China, and interprovincial transfers of SO2 embodied in trade were significantly determined by the population, economic development, coal consumption of the trade pairs, as well as their distance. SO2 emission mitigation policies, such as emission reduction target and sulfur dioxide control zone, has a more significant influence on the direct transfer of SO2 emission via direct bilateral trade, while their effects were largely offset by indirect trade (through third–party transfers). Our results do not support the pollution haven hypothesis existed in domestic trade in China during 2007–2012. Our paper sets an example and provides a reference for the domestic pollution transfer problem from an econometric perspective. Further attempts on testing pollution haven hypothesis in consideration of various pollutants are still needed to arrive at a robust conclusion.

The Euro and the CFA Franc: Evidence of Sectoral Trade Effects

This paper estimates a gravity model of trade to evaluate the trade effects of the Euro on sectoral trade within the Eurozone (EZ), the CFA Franc Zone (CFA) and between the EZ and the CFA, when CFA countries acquired fixed rates against the non-francophone EZ members. The formation of the EZ provides a quasi-natural experiment to estimate the effects on trade of fixed exchange rates, since the change in exchange rate regime for CFA countries with all EZ countries but France was not trade related. This is tested using sectoral trade data for 175 countries over the period 1995–2016 and validated using a longer time period starting in the seventies. The main departure from Frankel (2008), is the estimation of a structural gravity model using sectoral trade and bilateral-sectoral fixed effects as well as controls for multilateral resistance, namely time varying country-sector fixed-effects for exporters and importers, in a PPML framework. The main results indicate that the introduction of the Euro does show positive and significant effects for export flows from the CFA to other EZ countries different from France, whereas exports in the opposite direction are negatively affected. Moreover, the results differ by sector and we find that agricultural and homogeneous goods exports from CFA countries to Euro adopters increased by around forty and hundred twenty percent, respectively after the euro adoption.

The gravity model of trade

Purpose. The purpose of this study is to trace the theoretical developments of the gravity model of trade. The key question is: what are the dominant features of the development of the gravity trade model? Methodology. This research is conducted by employing a number of methods that include the historical, descriptive and analytical methods. The main contribution of this paper is to trace the historical and theoretical development phases of the gravity model. Findings. This study is a novel attempt in terms of the identification of the four distinctive phases of the development of the gravity model. This work would, therefore, expand the existing literature on the gravity model. We argue that the development of the gravity model is the outcome of many research efforts. A large body of literature has given the model a solid theoretical foundation. But there is no consensus about the proper econometric estimation methods of the model. The gravity model is significant both historically and analytically. It is a useful tool for the analysis of international trade. It has become a popular research device used by the researchers and policy makers around the world. The gravity is regarded as one of the most successful models in the literature of international economics. Originality. The original contributions of this paper lie in streamlining the consistent historical development of the gravity model over a longer period of time-frame, ranging from 1885 to 2018. Limitations and Implications. This work is theoretical aspects of the trade gravity model. Future researchers could overcome the limitations by combining the theoretical and empirical studies in a paper. This paper can help the future researchers in dealing with the broad body of literature of gravity model. Acknowledement. This study was supported by the National Natural Science Foundation of China (grants No.71673223 & 71473197), and a PhD scholarship from the China Scholarship Council (CSC). The first author would like to thank the CSC for the financial support. He also acknowledges the invaluable research advice and guidance received from Dr. Yoto V. Yotov, professor at the School of Economics of the Lebow College of Business at Drexel University, Philadelphia, USA. The authors are highly grateful to the anonymous reviewers, managing editor, and the editor-in chief for their kind help and critical comments on the earlier drafts of the paper. However, the authors are responsible for the contents and limitations of the study. They declared no conflict of interests.

Analysis of the Trade Potential between China and the Eight Countries in South Asia under the Background of the Belt and Road Initiative

Based on the trade potential model, this paper determines the trade potential relationship between China and the eight countries in South Asia in the context of the “Belt and Road”. Firstly, the panel data analysis method is used to study the overall situation of China's trade with South Asia from 2001 to 2014. Secondly, the trade gravity model is used to estimate the trade volume between China and the eight countries in South Asia. The estimated value is compared with the actual value to calculate China and the eight countries of South Asia. Trade potential value. Finally, based on the calculated potential value, the policy recommendations in the context of the “Belt and Road” are given.