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Estimating Gravity Equations: To Log or Not to Log?

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  • Boriss Siliverstovs
  • Dieter Schumacher

Abstract

This study compares two alternative approaches to estimate parameters in gravity equations. We compare the traditional OLS approach applied to the log-linear form of the gravity model with the Poisson Quasi Maximum Likelihood (PQML) estimation procedure applied to the non-linear multiplicative specification of the gravity model. We use the trade flows for all products, for all manufacturing products as well as for manufacturing products broken down by three-digit ISIC Rev.2 categories. We base our conclusions on the generalised gravity model of Bergstrand (1989) that allows us to investigate differences in factor-proportions and home-market effects at the industry level. In addition, we compare the effects of other explanatory variables such as exporter and importer total income, distance, preferential trade agreements, common border, historical ties, and common language on the volume of trade. Our study provides comprehensive evidence on likely qualitative and/or quantitative differences in the values of estimated coefficients as a result of application of an alternative estimation method. Our main conclusion is that both estimation results as well as results of the regression misspecification tests provide supporting evidence for the PQML estimation approach over the OLS estimation method.

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Bibliographic Info

Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 739.

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Length: 38 p.
Date of creation: 2007
Date of revision:
Handle: RePEc:diw:diwwpp:dp739

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Keywords: generalised gravity equation; Poisson regression;

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  1. James E. Anderson & Eric van Wincoop, 2000. "Gravity with Gravitas: A Solution to the Border Puzzle," Boston College Working Papers in Economics, Boston College Department of Economics 485, Boston College Department of Economics.
  2. 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.
  3. Willard G. Manning & John Mullahy, 1999. "Estimating Log Models: To Transform or Not to Transform?," NBER Technical Working Papers 0246, National Bureau of Economic Research, Inc.
  4. Joao Santos Silva & Silvana Tenreyro, 2005. "The Log of Gravity," CEP Discussion Papers dp0701, Centre for Economic Performance, LSE.
  5. Geraci, Vincent J & Prewo, Wilfried, 1977. "Bilateral Trade Flows and Transport Costs," The Review of Economics and Statistics, MIT Press, vol. 59(1), pages 67-74, February.
  6. Simon Peters, 2000. "On the use of the RESET test in microeconometric models," Applied Economics Letters, Taylor & Francis Journals, Taylor & Francis Journals, vol. 7(6), pages 361-365.
  7. André Sapir, 1981. "Trade benefits under the EEC generalized system of preferences," ULB Institutional Repository 2013/8290, ULB -- Universite Libre de Bruxelles.
  8. Aitken, Norman D, 1973. "The Effect of the EEC and EFTA on European Trade: A Temporal Cross-Section Analysis," American Economic Review, American Economic Association, American Economic Association, vol. 63(5), pages 881-92, December.
  9. Robert C. Feenstra & James R. Markusen & Andrew K. Rose, 2001. "Using the gravity equation to differentiate among alternative theories of trade," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 34(2), pages 430-447, May.
  10. Dieter Schumacher & Boriss Siliverstovs, 2006. "Home-Market and Factor-Endowment Effects in a Gravity Approach," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 142(2), pages 330-353, July.
  11. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," Journal of Economic Literature, American Economic Association, vol. 42(3), pages 691-751, September.
  12. 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.
  13. Deardorff, Alan V, 1982. "The General Validity of the Heckscher-Ohlin Theorem," American Economic Review, American Economic Association, American Economic Association, vol. 72(4), pages 683-94, September.
  14. Anderson, James E, 1979. "A Theoretical Foundation for the Gravity Equation," American Economic Review, American Economic Association, American Economic Association, vol. 69(1), pages 106-16, March.
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Cited by:
  1. Guy Lalanne & Ines Buono, 2010. "La réaction des entreprises françaises à la baisse des tarifs douaniers étrangers," Économie et Statistique, Programme National Persée, Programme National Persée, vol. 435(1), pages 13-29.
  2. Iwasaki, Ichiro & Suganuma, Keiko, 2013. "A Gravity Model of Russian Trade: The Role of Foreign Direct Investment and Socio-Cultural Similarity," RRC Working Paper Series, Russian Research Center, Institute of Economic Research, Hitotsubashi University 40, Russian Research Center, Institute of Economic Research, Hitotsubashi University.
  3. I. Buono & G. Lalanne, 2010. "The reaction of French firms to the decrase of foreign tariffs," Documents de Travail de la DESE - Working Papers of the DESE, Institut National de la Statistique et des Etudes Economiques, DESE g2010-10, Institut National de la Statistique et des Etudes Economiques, DESE.
  4. Lavallée, Emmanuelle & Lochard, Julie, 2012. "Independence and trade: the specic effects of French colonialism," Economics Papers from University Paris Dauphine 123456789/9564, Paris Dauphine University.
  5. Bernhard Herz & Marco Wagner, 2010. "Multilateralism versus Regionalism!?," DEGIT Conference Papers, DEGIT, Dynamics, Economic Growth, and International Trade c015_043, DEGIT, Dynamics, Economic Growth, and International Trade.
  6. Estrella Gómez-Herrera, 2013. "Comparing alternative methods to estimate gravity models of bilateral trade," Empirical Economics, Springer, Springer, vol. 44(3), pages 1087-1111, June.
  7. Herz, Bernhard & Wagner, Marco, 2010. "The dark side of the generalized system of preferences," Working Papers 02/2010, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung.
  8. Sylvanus Kwaku Afesorgbor, 2013. "Revisiting the Effectiveness of African Economic Integration. A Meta-Analytic Review and Comparative Estimation Methods," Economics Working Papers, School of Economics and Management, University of Aarhus 2013-13, School of Economics and Management, University of Aarhus.
  9. Marine George, 2013. "Does cross-border regulation really influence cross-border trade? Evidence from the Services Trade Restrictions Index," Post-Print dumas-00909960, HAL.
  10. Lavallée, Emmanuelle & Lochard, Julie, 2012. "Independence and trade: new evidence from French colonial trade data," Economics Papers from University Paris Dauphine 123456789/10246, Paris Dauphine University.
  11. Shingal, ANIRUDH, 2011. "Foreign market access in government procurement," MPRA Paper 32814, University Library of Munich, Germany.
  12. Shingal, ANIRUDH, 2009. "How much do agreements matter for services trade?," MPRA Paper 32815, University Library of Munich, Germany, revised 15 May 2010.
  13. Olga Solleder, 2013. "Trade Effects of Export Taxes," IHEID Working Papers, Economics Section, The Graduate Institute of International Studies 08-2013, Economics Section, The Graduate Institute of International Studies, revised 08 Apr 2013.
  14. P. Dorian Owen & Niven Winchester, 2011. "The impact of US fresh milk production standards on dairy trade," Working Papers, University of Otago, Department of Economics 1117, University of Otago, Department of Economics, revised Dec 2011.
  15. Muhammad, Kabeer & Yücer, Aycil, 2010. "Trade effects of Regional Trade Agreements : trade creation and trade diversion within the Western Hemisphere," Economics Papers from University Paris Dauphine 123456789/10626, Paris Dauphine University.
  16. Cipollina, Maria & Laborde, David & Salvatici, Luca, 2013. "Do Preferential Trade Policies (Actually) Increase Exports? An analysis of EU trade policies," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C., Agricultural and Applied Economics Association 150177, Agricultural and Applied Economics Association.
  17. Felix Groba, 2011. "Determinants of Trade with Solar Energy Technology Components: Evidence on the Porter Hypothesis?," Discussion Papers of DIW Berlin 1163, DIW Berlin, German Institute for Economic Research.

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