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

Author

Listed:
  • Inmaculada Martínez-Zarzoso

    (University Jaime I)

  • Felicitas Nowak-Lehmann

    (University of Göettingen)

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. :

Suggested Citation

  • Inmaculada Martínez-Zarzoso & Felicitas Nowak-Lehmann, 2003. "Augmented Gravity Model: An Empirical Application to Mercosur-European Union Trade Flows," Journal of Applied Economics, Universidad del CEMA, vol. 6, pages 291-316, November.
    • Handle: RePEc:cem:jaecon:v:6:y:2003:n:2:p:291-316
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    References listed on IDEAS

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    More about this item

    Keywords

    gravity equation; panel data; infrastructure; integration;
    All these keywords.

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F15 - International Economics - - Trade - - - Economic Integration

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