Gravity model research paper

The data used in this paper are analyzed with gravity model, which has good characteristics and very stable performance.

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Further, the data sample is formed on major importers form the Southeastern Europe region. The results show that the domestic country GDP is positively correlated with the exports from the source country to target countries and that Balkan countries have positive propensities to import from Macedonia, however, it was found that populations of source country and target country are negatively correlated with exports from the source country to target countries.

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Additionally, the business cycles had no positive effect on Macedonian export to the target countries. Based on pertinent theoretical concepts and existing empirical findings, and by applying up-to-date methodological approach, case studies might bring vital contribution to the literature, which eventually leads to solid policy and practice.

Apostolov, M.

Please share your general feedback. You can start or join in a discussion here. Visit emeraldpublishing. Abstract Purpose The purpose of this paper is to examine the export performance of the Republic of Macedonia to its main trading partners from Southeast Europe; hence, the authors focus on the major importing countries which are most present in the Macedonian trade balance.

An analysis of EU wine trade: A gravity model approach | SpringerLink

Comparative advantage in factor endowments would suggest the opposite would occur. The problem has become known as the Leontief paradox. An alternative theory, first proposed by Staffan Linder , predicts that patterns of trade will be determined by the aggregated preferences for goods within countries. Those countries with similar preferences would be expected to develop similar industries. With continued similar demand, these countries would continue to trade back and forth in differentiated but similar goods since both demand and produce similar products.

For instance, both Germany and the United States are industrialized countries with a high preference for automobiles. Both countries have automobile industries, and both trade cars.

The empirical validity of the Linder hypothesis is somewhat unclear. Several studies have found a significant impact of the Linder effect, but others have had weaker results.

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Studies that do not support Linder have only counted countries that actually trade; they do not input zero values for the dyads where trade could happen but does not. This has been cited as a possible explanation for their findings. Also, Linder never presented a formal model for his theory, so different studies have tested his hypothesis in different ways. Elhanan Helpman and Paul Krugman asserted that the theory behind comparative advantage does not predict the relationships in the gravity model. Using the gravity model, countries with similar levels of income have been shown to trade more.

Helpman and Krugman see this as evidence that these countries are trading in differentiated goods because of their similarities. This casts some doubt about the impact Heckscher—Ohlin has on the real world.

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  • However, he does say Helpman—Krugman is different from the usual interpretation of Linder, but, since Linder made no clear model, the association between the two should not be completely discounted. Alan Deardorff adds the possibility, that, while not immediately apparent, the basic gravity model can be derived from Heckscher—Ohlin as well as the Linder and Helpman—Krugman hypotheses.

    Deardorff concludes that, considering how many models can be tied to the gravity model equation, it is not useful for evaluating the empirical validity of theories. Bridging economic theory with empirical tests, James Anderson and Jeffrey Bergstrand develop econometric models, grounded in the theories of differentiated goods, which measure the gains from trade liberalizations and the magnitude of the border barriers on trade see Home bias in trade puzzle. A recent synthesis of empirical research using the gravity equations, however, shows that the effect of border barriers on trade is relatively modest.

    This model of trade is consistent with the gravity model as it would predict that trade depends on country size.


    The reciprocal dumping model has held up to some empirical testing, suggesting that the specialization and differentiated goods models for the gravity equation might not fully explain the gravity equation. Feenstra, Markusen, and Rose provided evidence for reciprocal dumping by assessing the home market effect in separate gravity equations for differentiated and homogeneous goods. The home market effect showed a relationship in the gravity estimation for differentiated goods, but showed the inverse relationship for homogeneous goods. The authors show that this result matches the theoretical predictions of reciprocal dumping playing a role in homogeneous markets.

    Past research using the gravity model has also sought to evaluate the impact of various variables in addition to the basic gravity equation. Among these, price level and exchange rate variables have been shown to have a relationship in the gravity model that accounts for a significant amount of the variance not explained by the basic gravity equation.

    According to empirical results on price level, the effect of price level varies according to the relationship being examined. For instance, if exports are being examined, a relatively high price level on the part of the importer would be expected to increase trade with that country.

    Macedonia’s exports toward Southeast Europe through the gravity model

    A non-linear system of equations are used by Anderson and van Wincoop to account for the endogenous change in these price terms from trade liberalization. Since the gravity model for trade does not hold exactly, in econometric applications it is customary to specify. However, this approach has two major problems. Second, Santos Silva and Tenreyro argued that estimating the log-linearized equation by least squares OLS can lead to significant biases.

    As an alternative, these authors have suggested that the model should be estimated in its multiplicative form, i. This is despite the fact that simpler methods, such as taking simple averages of trade shares of countries with and without former colonial ties suggest that countries with former colonial ties continue to trade more.

    Santos Silva and Tenreyro did not explain where their result came from and even failed to realize their results were highly anomalous. Martin and Pham argued that using PPML on gravity severely biases estimates when zero trade flows are frequent. In applied work, the model is often extended by including variables to account for language relationships, tariffs, contiguity, access to sea, colonial history, and exchange rate regimes.

    Yet the estimation of structural gravity, based on Anderson and van Wincoop , requires the inclusion of importer and exporter fixed effects, thus limiting the gravity analysis to bilateral trade costs Baldwin and Taglioni From Wikipedia, the free encyclopedia. Quarterly Journal of Economics.