Evaluating Trade between India and North America using Gravity

Models

The theoretical foundations of gravity models: Newton’s Law The model has been adapted from Newton’s laws of

gravitation Statistically measure bilateral trade flows between

different geographical entities or regions In the simplest gravity model, bilateral trade flows

between two countries are assumed to be proportional to the product of their gross domestic products

and inversely proportional to a measure of the distance between them

The Two FrameworksThe Gravity Model

F = K×GDPi×GDPj d2

F = The Flow of Trade

GDPi = GDP of country i GDPj = GDP of country j d = distance between

economic capitals of countries i and j

(sometimes measured by ports).K = is a constant.

The Newton Model

F = G×m1×m2

r2

F = The force of attraction m1 = mass of object 1 m2 = mass of object 2 r = the distance G = is a constant.

Estimated gravity equation Newton’s Law-based Normal Trade Normal trade The basic equation depend upon two major

variables: GDP and distance Positive correlation of trade to GDP and

negative correlation with distance

ln (Tradeij) = C + a ln(GDPi) + b ln(GDPj) + +c ln(distanceij) + uij

“Augmenting” the gravity equations

Income per capita (higher income countries trade more)

Adjacency Common language, colonial links Institutions, infrastructures, labour flows,... Surprisingly, bilateral tariff barriers often

missing!!!

“Augmenting” gravity model Traditional approach to evaluate the impact of

RTAs: Trade creation and trade diversion

ln (Tradeij) = a ln(GDPi) + b ln(GDPj) + +c ln(distanceij, ,adjacency, language ..) + d (Dummy i) +

+ e (Dummy j) + g (intra-RTAij)+ h (extra-RTAij) + uij

IMPORTANT the gravity model does not estimate welfare effects

North America

GDP & Distance GDP is used to determine the size of the country The more the GDP, the more the trade India’s GDP is tenth largest in the world India’s trade with larger economies is more Distance between India and North America is

high High distances convert to high freight and

transportation cost

Common Language Dummy variable which was augmented

on the Gravity Model We took binary variable i.e. 0 and 1

values for having a common language with India

Perception is that common language increases trade between nations

Population & Area Higher population translates to more

trade

Methodology Data has been taken from 2003 to 2010 Demographic and GDP data :

WorldBank Distances data: WorldAtlas Trade data: WITS Multiple regression using SPSS Data available only for 19 out of 23

countries

The Output Model Summary

Model R R Square Adjusted R Square Std. Error of the Estimate

1 0.888385 0.789228 0.782317 1.149847

a. Predictors: (Constant), Population, GDP_India, Distance, Area, Language, GDP

ANOVAbModel Sum of Squares df Mean Square F Sig.

1 Regression 905.9843 6 150.9974 114.2061 0Residual 241.953 183 1.322148Total 1147.937 189

a. Predictors: (Constant), Population, GDP_India, Distance, Area, Language, GDPb. Dependent Variable: Export

The Output Coefficientsa

Model Unstandardized Coefficients

Standardized Coefficients

t Sig.

Std. Error Beta

1 (Constant) 16.76 17.78 0.94 0.35

GDP 0.12 0.05 0.14 2.30 0.02

GDP_India 1.33 0.20 0.22 6.56 0.00

Area 0.55 0.05 0.67 10.41 0.00

Language 0.16 0.28 0.03 0.58 0.56

Distance -6.04 1.71 -0.18 -3.53 0.00

Population 0.03 0.04 0.04 0.80 0.42a. Dependent Variable: Export

Language and Population are not significant

The OutputModel Summary

Model R R Square Adjusted R Square Std. Error of the Estimate

Change Statistics

R Square Change F Change

1 0.887876 0.7883 0.783747 1.146065 0.788324 172.2439

a. Predictors: (Constant), Distance, GDP_India, GDP, Area

ANOVAbModel Sum of Squares df Mean Square F Sig.

1 Regression 904.946 4.000 226.237 172.244 0.000

Residual 242.991 185.000 1.313

Total 1147.937 189.000

a. Predictors: (Constant), Distance, GDP_India, GDP, Areab. Dependent Variable: Export

The OutputCoefficientsa

Model Unstandardized Coefficients

Standardized Coefficients

t Sig. Collinearity Statistics

Std. Error Beta Tolerance VIF

1 (Constant) 28.108 12.651 2.222 0.028

GDP 0.144 0.043 0.172 3.312 0.001 0.425 2.354

GDP_India1.318 0.202 0.223 6.539 0.000 0.988 1.013

Area 0.538 0.043 0.653 12.508 0.000 0.420 2.379

Distance -6.457 1.140 -0.197 -5.663 0.000 0.950 1.053

a. Dependent Variable: Export

The Equation

Thank You!