Gravity Model applied on Trade Flows between Portugal and the OECD

The study analyses foreign trade between Portugal and the OECD countries in the period 1980-2020. The objective, of course, is to analyse foreign trade and understand the main factors that influence foreign trade. The analysis is estimated using a gravity model, analysed using ordinary least squares, random effects, fixed effects and the Hausman Taylor estimator. According to the results, there is a negative impact of the real GDP of the country of origin, Portugal being in the sample, and a positive impact on the economies of the destination countries, thus being relevant for explaining trade. These results are related to the fact that most OECD countries have a significantly larger economic size than Portugal. Physical distance produced results that show a negative impact on the volume of trade transacted, so when trade is made with the countries furthest away from Portugal (with Australia, for example), the volume of trade drops to -5.60 ‘coeteris paribus’. On the other hand, the real effective exchange rate (reer) has a positive impact of 1.6. We also used some binary variables to analyse whether trade is made with a country that belongs to an economic integration zone itself, so trade made with a country in the European Union produces negative impacts, unlike the results of the binary variable MERCOSSUR, which characterises whether countries belong to this economic bloc, where there are positive impacts on trade volume when trade is made with Brazil or Argentina, for example.