IEB_GRP4_The Gravity Model Specification for Modeling International Trade Flows
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Transcript of IEB_GRP4_The Gravity Model Specification for Modeling International Trade Flows
8/2/2019 IEB_GRP4_The Gravity Model Specification for Modeling International Trade Flows
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The Gravity Model Specification forModelling International Trade Flows andFree Trade Agreement Effects: A 10-YearReview of Empirical Studies
Konstantinos Kepaptsoglou, Matthew G. Karlaftis and DimitriosTsamboulas
8/2/2019 IEB_GRP4_The Gravity Model Specification for Modeling International Trade Flows
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FLOW OF PRESENTATION
§ Objective of the paper
§ Introduction GRAVITY MODEL OF TRADE
§ Framework GRAVITY MODEL OF TRADE
§ Parameters GRAVITY MODEL OF TRADE
§ Methodological Aspects
§ Empirical Findings
8/2/2019 IEB_GRP4_The Gravity Model Specification for Modeling International Trade Flows
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ü To provide a systematic review of recent work on
trade flow modelling from an empirical perspectiveoffering a basis for evaluating current research
ü To provide insights on the effects of FTAs on trade asexplained by gravity model specifications
ü To provide an overview of the different modelling
approaches for explaining trade flows
ü To present the gravity model and proposing aframework for categorizing existing studies
OBJECTIVE OF THE PAPER
8/2/2019 IEB_GRP4_The Gravity Model Specification for Modeling International Trade Flows
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The GRAVITY MODEL is an empirical model that
follows from the equation of gravitational attractionproposed in Newtonian Mechanics.
GRAVITY MODEL OF TRADE
§ F: Force of gravitational
attraction§ m1: mass of body 1
§ m2: mass of body 2
§ r: distance between them
§ G: Gravitational Constant
PHYSICS TRADE
§ T12: Force of
gravitational attraction§ GDP1: mass of body 1
§ GDP2:mass of body 2
§ d: distance between them
§ C12: constant
8/2/2019 IEB_GRP4_The Gravity Model Specification for Modeling International Trade Flows
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Volume of trade can beestimated as:
§ An increasing function of the national incomes of
trading partners
§ A decreasing function of
the distance between them
GRAVITY MODEL OF TRADE
§ The constant ( C12) is not predetermined
§ This constant varies for each pair of economies and it has to be estimated througha regression analysis which fits historical trade
data to the historical GDPs of the economies in
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• Introduced by Tinbergen and Linneman (1966)
• Widely used for explaining flows of International
trade
• To explain and predict the effects of Free Trade
Agreements on trade flows
• Strength: considerable empirical robustness and
GRAVITY MODEL OF TRADEContd….
CountryB
Country
ADistance
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A THREE LAYER FRAMEWORK
A three layer framework is proposedfor organizing studies related to gravitybased trade flow modelling
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A THREE LAYER FRAMEWORK • LAYERS • PROPERTIES
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PARAMETERS: DATASETS
• PANEL DATA are used in most studies for periods of at least 5years
• Only few recent studies draw conclusions based on CROSS-SECTIONAL DATA based on a single year or an average of aperiod.
CROSS SECTIONAL DATA
§ Cross-sectional data in statistics and econometrics is a type of one-
dimensional data set.
§ It refers to data collected by observing many subjects (such as individuals,
firms or countries/regions) at the same point of time, or without regard to
differences in time.
8/2/2019 IEB_GRP4_The Gravity Model Specification for Modeling International Trade Flows
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PARAMETERS: DATASETS
PANEL DATA
§ Multi-dimensional data.
§ It contains observations on multiple phenomena observed over
multiple time periods for the same firms or individuals.
§ Cross-sectional data is a special case of panel data that is in
one-dimension only
EXAMPLEBalanced panel Unbalanced panel
8/2/2019 IEB_GRP4_The Gravity Model Specification for Modeling International Trade Flows
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•
DEPENDANTVARIABLES
Exports and bilateral trade flows arethe most common dependent variables
found in trade flow gravity models• EXPLORATORYVARIABLES
Explanatory variables can be
distinguished in the following twogroups:
§ Factors indicating demand and supply of tradingcountries
§ Factors representing the impedance imposed on a
PARAMETERS:DEPENDANT AND
EXPLORATORY VARIABLES
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– Factors indicating demand andsupply of trading countries
Examples:
•
Measures of a country’s economic andmarket size
• Income level
•
Population• Area size
• GDP per capita
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– Impedance Factors
All those elements that affect trade flows in anegative or positive manner. Transportationcosts are the main resistance factors;
These include:• Actual freight transportation costs
• tariffs
• quality of infrastructure, etc.
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METHODOLOGICAL ASPECTS
The Ordinary Least Squares (OLS)method has been traditionally the usualtechnique for estimating the coefficientsof the gravity model specification in its
log linear form.
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METHODOLOGICAL ASPECTS
LOG LINEAR FORM OF GRAVITY MODEL• Consider a flow of goods Fij between two areas i and j. Fij can
then be expressed as a function of the characteristics of the
origin (Oi) and the destination (Dj) areas and some measure of
impedance between them (Rij):
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METHODOLOGICAL ASPECTS
ORDINARY LEAST SQUARE (OLS) METHOD
ü It is a method for estimating the unknown parameters in
a linear regression model.
ü This method minimizes the sum of squared vertical distances
between the observed responses in the dataset and the
responses predicted by the linear approximation.
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q With over 55 papers published within the last decade, the gravitymodel has been established as a major instrument for analyzing
trade flows and explaining effects of related trade agreements.
q Despite earlier criticism, the research community has madeefforts both in improving the model’s theoretical foundation and
adopted novel econometric methods for estimating itsparameters with more accuracy.
q Panel data sets are preferred over Cross sectional models
q GDP, GDP per capita and distance are the most commonexploratory variables
q Distance is always encountered as impedance variable
EMPHERICAL FINDINGS
FREE TRADE AGREEMENTS
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The aim of FTAs is to increase tradebetween two countries as a result of relaxing or removing existing
institutional and economic barriers
Free Trade Agreementsare forms of trade pactsbetween countries;these agreementseliminate tariffs, quotasand other barriers for anumber of goods (if not
for all),traded betweeninvolved partners.
FREE TRADE AGREEMENTS
A EXAMPLE f EMPHERICAL
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An EXAMPLE of EMPHERICALSTUDY
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REFERENCES
• Linneman H. An econometric study of world trade
flows. Amsterdam: North-Holland Publishing Co. 1966.
§ http://info.worldbank.org
• Arghyrou MG. EU participation and the external tradeof Greece: an appraisal of the evidence. Appl Econ2000; 32(2): 151-9.
§ ejas-iimb.org/articles/57.php
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