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Augmented Gravity Model: An Empirical Application to Mercosur-European Union Trade Flows

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Author Info
Inmaculada Martínez-Zarzoso () (University Jaime I)
Felicitas Nowak-Lehmann (University of Göettingen)

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Abstract

This paper applies the gravity trade model to assess Mercosur-European Union trade, and trade potential following the agreements reached recently between both trade blocs. The model is tested for a sample of 20 countries, the four formal members of Mercosur plus Chile and the fifteen members of the European Union. A panel data analysis is used to disentangle the time invariant country-specific effects and to capture the relationships between the relevant variables over time. We find that the fixed effect model is to be preferred to the random effects gravity model. Furthermore, a number of variables, namely, infrastructure, income differences and exchange rates added to the standard gravity equation, are found to be important determinants of bilateral trade flows.

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File URL: http://www.cema.edu.ar/publicaciones/download/volume6/martinez.pdf
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Publisher Info
Article provided by Universidad del CEMA in its journal Journal of Applied Economics.

Volume (Year): VI (2003)
Issue (Month): (November)
Pages: 291-316
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:cem:jaecon:v:6:y:2003:n:2:p:291-316

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Related research
Keywords: gravity equation; panel data; infrastructure; integration;

Find related papers by JEL classification:
F14 - International Economics - - Trade - - - Country and Industry Studies of Trade
F15 - International Economics - - Trade - - - Economic Integration

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Oguledo, Victor Iwuagwu & MacPhee, Craig R, 1994. "Gravity Models: A Reformulation and an Application to Discriminatory Trade Arrangements," Applied Economics, Taylor and Francis Journals, vol. 26(2), pages 107-20, February.
  2. James E. Anderson & Eric van Wincoop, 2001. "Gravity with Gravitas: A Solution to the Border Puzzle," NBER Working Papers 8079, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Diao, Xinshen & Somwaru, Agapi, 2000. "An Inquiry on General Equilibrium Effects of MERCOSUR--An Intertemporal World Model," Journal of Policy Modeling, Elsevier, vol. 22(5), pages 557-588, September. [Downloadable!] (restricted)
  4. Bougheas, Spiros & Demetriades, Panicos O. & Morgenroth, Edgar L. W., 1999. "Infrastructure, transport costs and trade," Journal of International Economics, Elsevier, vol. 47(1), pages 169-189, February. [Downloadable!] (restricted)
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  5. Yeats, Alexander J, 1998. "Does Mercosur's Trade Performance Raise Concerns about the Effects of Regional Trade Arrangements?," World Bank Economic Review, Oxford University Press, vol. 12(1), pages 1-28, January.
  6. Bergstrand, Jeffrey H, 1985. "The Gravity Equation in International Trade: Some Microeconomic Foundations and Empirical Evidence," The Review of Economics and Statistics, MIT Press, vol. 67(3), pages 474-81, August. [Downloadable!] (restricted)
  7. Shang-Jin Wei, 1996. "Intra-National versus International Trade: How Stubborn are Nations in Global Integration?," NBER Working Papers 5531, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Egger, Peter, 2000. "A note on the proper econometric specification of the gravity equation," Economics Letters, Elsevier, vol. 66(1), pages 25-31, January. [Downloadable!] (restricted)
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  9. Bergstrand, Jeffrey H, 1989. "The Generalized Gravity Equation, Monopolistic Competition, and the Factor-Proportions Theory in International Trade," The Review of Economics and Statistics, MIT Press, vol. 71(1), pages 143-53, February. [Downloadable!] (restricted)
  10. Deardorff, A.V., 1995. "Determinants of Bilateral Trade : Does Gravity Work in a Neoclassical World?," Papers 95-05, Michigan - Center for Research on Economic & Social Theory.
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  11. Fritz Breuss & Peter Egger, 1999. "How Reliable Are Estimations of East-West Trade Potentials Based on Cross-Section Gravity Analyses?," Empirica, Springer, vol. 26(2), pages 81-94, June. [Downloadable!] (restricted)
  12. Soloaga, Isidro & Winters, L. Alan, 1999. "Regionalism in the Nineties: What Effect on Trade?," CEPR Discussion Papers 2183, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  13. Helpman, Elhanan, 1987. "Imperfect competition and international trade: Evidence from fourteen industrial countries," Journal of the Japanese and International Economies, Elsevier, vol. 1(1), pages 62-81, March. [Downloadable!] (restricted)
  14. Laszlo Matyas, 1997. "Proper Econometric Specification of the Gravity Model," The World Economy, Blackwell Publishing, vol. 20(3), pages 363-368, 05. [Downloadable!] (restricted)
  15. Anderson, James E, 1979. "A Theoretical Foundation for the Gravity Equation," American Economic Review, American Economic Association, vol. 69(1), pages 106-16, March. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Vlontzos, G. & Duquenne, M.N., 2008. "Greek Olive Oil: How Can Its International Market Potential Be Realized?," Estey Centre Journal of International Law and Trade Policy, Estey Centre for Law and Economics in International Trade, vol. 9(2). [Downloadable!]
  2. Eita, Joel Hinaunye & Jordaan, Andre C., 2007. "Estimating The Tourism Potential In Namibia," MPRA Paper 5788, University Library of Munich, Germany. [Downloadable!]
  3. Inmaculada Martínez-Zarzoso & Felicitas Nowak-Lehmann D. & Nicholas Horsewood, 2006. "Effects of Regional Trade Agreements Using a Static and Dynamic Gravity Equation," Ibero America Institute for Econ. Research (IAI) Discussion Papers 149, Ibero-America Institute for Economic Research. [Downloadable!]
  4. Cortes, Maria, 2007. "Composition of Trade between Australia and Latin America: Gravity Model," Economics Working Papers wp07-19, School of Economics, University of Wollongong, NSW, Australia. [Downloadable!]
  5. Levin, Jörgen & Olin, Mikael, 2008. "Trade Policies and Export growth - employment and poverty impact in Tanzania," Working Papers 2008:1, Örebro University, Swedish Business School. [Downloadable!]
  6. Selva, Ma Luisa Marti & Alvarez-Coque, Jose Ma Garcia, 2006. "A Gravity Approach to Assess the Effects of Association Agreements on Euromediterranean Trade of Fruits and Vegetables," Working Papers 18874, TRADEAG - Agricultural Trade Agreements. [Downloadable!]
    Other versions:
  7. NOWAK-LEHMANN D., Felicitas & HERZER, Dierk & VOLLMER, Sebastian, 2007. "The Free Trade Agreement Between Chile And The Eu: Its Potential Impact On Chile’S Export Industry," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 7(1). [Downloadable!] (restricted)
    Other versions:
  8. Mustafizur Rahman & Wasel Bin Shadat & Narayan Chandra Das, 2006. "Trade Potential in SAFTA: An Application of Augmented Gravity Model," Occasional Papers 61, Centre for Policy Dialogue (CPD). [Downloadable!]
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