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

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  • Inmaculada Martinez-Zarzoso
  • Felicitas Nowak-Lehmann

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 Martinez-Zarzoso & Felicitas Nowak-Lehmann, 2003. "Augmented Gravity Model: An Empirical Application to Mercosur-European Union Trade Flows," Journal of Applied Economics, Taylor & Francis Journals, vol. 6(2), pages 291-316, November.
    • Handle: RePEc:taf:recsxx:v:6:y:2003:i:2:p:291-316
    DOI: 10.1080/15140326.2003.12040596
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    JEL classification:

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

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