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Gravity models and the Law of Large Numbers

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  • Jareb, Colin
  • Nigai, Sergey

Abstract

This paper examines the implications of uncertainty in gravity models of trade due to the violation of the Law of Large Numbers (LLN) that we document in the data. When the number of available technologies is finite and the LLN does not hold, the variance of the stochastic component in gravity models is large, which leads to the poor goodness of fit of gravity models and high uncertainty in comparative statics results. We offer a procedure that specifies counterfactual predictions in terms of distributions rather than point estimates and helps to account for such uncertainty.

Suggested Citation

  • Jareb, Colin & Nigai, Sergey, 2022. "Gravity models and the Law of Large Numbers," Economics Letters, Elsevier, vol. 221(C).
    • Handle: RePEc:eee:ecolet:v:221:y:2022:i:c:s0165176522003858
    DOI: 10.1016/j.econlet.2022.110911
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    More about this item

    Keywords

    Trade gravity; Law of Large Numbers; Hat algebra; Gains from trade;
    All these keywords.

    JEL classification:

    • F1 - International Economics - - Trade
    • F6 - International Economics - - Economic Impacts of Globalization
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F17 - International Economics - - Trade - - - Trade Forecasting and Simulation

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