The Gravity Model in International Trade

How do borders affect trade? Are cultural and institutional differences important for trade? Is environmental policy relevant to trade? How does one's income or wage relate to the fact that trade partners are nearby or far away? These are just some of the important questions that can be answered using the gravity model of international trade. This model predicts and explains bilateral trade flows in terms of the economic size and distance between trading partners (e.g. states, regions, countries, trading blocs). In recent years, there has been a surge of interest in this model and it is now one of the most widely applied tools in applied international economics. This 2010 book traces the history of the gravity model and takes stock of recent methodological and theoretical advances, including new approximations for multilateral trade resistance, insightful analyses of the measurement of economic distance and analyses of foreign direct investment. 'Theoretical foundations and empirical estimation strategy of gravity models have significantly advanced over the last years. By tracing the history of this evolution and offering a rich sample of applications, this book will prove to be a very useful reference to both those new to the field and those in search of an up-to-date treatment of theoretical and methodological issues related to gravity models.' Roberta Piermartini, World Trade OrganisationList of figures; List of tables; 1. Introduction: the comeback of the gravity equation S. Brakman and P. A. G. van Bergeijk; Part I. Methodology: 2. A general equilibrium theory for estimating gravity equations of bilateral FDI, final goods, and intermediate trade flows J. H. Bergstrand and P. Egger; 3. The incidence of gravity J. E. Anderson; 4. Approximating general equilibrium impacts of trade liberalizations using the gravity equation: applications to NAFTA and the European Economic Area S. L. Baier and J. H. Bergstrand; 5. An extended gravity model with substitution applied to international trade J. A. Bikker; Part II. Distance in the Gravity Model: 6. Illusory border effects: distance mismeasurement inflates estimates of home bias in trade K. Head and T. Mayer; 7. Trade costs, market access and economic geography: why the empirical specification of trade costs matters M. Bosker and H. Garretsen; 8. Intangible barriers to international trade: a sectoral approach J. Mohlmann, S. Ederveen, H. L. F. de Groot and G.-J. M. Linders; Part III. Specific Applications: 9. International environmental arrangements and international commerce A. Rose and M. Spiegel; 10. Diplomatic relations and trade reorientation in transition countries E. Afman and M. Maurel; 11. Unlocking the value of cross-border mergers and acquisitions S. Brakman, H. Garretsen, G. Garita and C. van Marrewijk; 12. The impact of economic geography on GDP per capita in OECD countries H. Boulhol and A. de Serres; Index.