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An extended gravity model with substitution applied to international trade


  • Jacob Bikker


The traditional gravity model has been applied many times to international trade flows, especially in order to analyze trade creation and trade diversion. However, there are two fundamental objections to the model: it cannot describe substitutions between flows and it lacks a cogent theoretical foundation. A newly developed model, the Extended Gravity Model (EGM), overcomes these objections. The model shares characteristics of the models of Bergstrand (1985), Andersen and Van Wincoop (2003), and Redding and Scott (2003). An empirical test on a world-wide sample of 19 thousand 2005 trade flows strongly rejects the gravity model in favour of the EGM. The empirical analysis also shows that the gravity model widely overestimates the influence of the determinants of international trade, which is due to strong substitution between trade flows, reducing the initial (gravity model) effects. Substitution determines both trade creation and trade diversion. The EGM encompasses several models originating in regional economics, and can be applied usefully to a wide set of subjects.ÂÂ ÂÂ ÂÂ ÂÂ ÂÂ ÂÂ ÂÂ ÂÂ ÂÂ ÂÂ ÂÂ

Suggested Citation

  • Jacob Bikker, 2009. "An extended gravity model with substitution applied to international trade," DNB Working Papers 215, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:215

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    1. Jacob A. Bikker & Aart F. De Vos, 1992. "An international trade flow model with zero observations: an extension of the Tobit model," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 135, pages 379-404.
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    Cited by:

    1. Joras Ferwerda & Mark Kattenberg & Han-Hsin Chang & Brigitte Unger & Loek Groot & Jacob A. Bikker, 2013. "Gravity models of trade-based money laundering," Applied Economics, Taylor & Francis Journals, vol. 45(22), pages 3170-3182, August.
    2. repec:spr:jknowl:v:8:y:2017:i:3:d:10.1007_s13132-015-0279-y is not listed on IDEAS

    More about this item


    bilateral trade; imports; exports; spatial allocation; trade creation; trade diversion; distance; market access; supplier access; multilateral resistance terms; ÂÂ ÂÂ ÂÂ remoteness indices.ÂÂ ÂÂ ÂÂ ÂÂ ÂÂ ÂÂ ÂÂ ÂÂ ÂÂ ÂÂ ÂÂ;

    JEL classification:

    • F1 - International Economics - - Trade
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

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