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Augmented gravity model: An empirical application to Mercosur- European trade flows

Author

Listed:
  • Inmaculada Martínez-Zarzoso

    (Ibero-America Institute for Economic Research of the University of Goettingen)

  • Felicitas Nowak-Lehmann D.

    (Ibero-America Institute for Economic Research of the University of Goettingen)

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 blocks. The model ist tested for a sample of 19 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 D., 2003. "Augmented gravity model: An empirical application to Mercosur- European trade flows," International Trade 0309019, EconWPA.
  • Handle: RePEc:wpa:wuwpit:0309019
    Note: Type of Document - Acrobat PDF; pages: 23 ; figures: none
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    References listed on IDEAS

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    1. Diao, Xinshen & Somwaru, Agapi, 2000. "An Inquiry on General Equilibrium Effects of MERCOSUR--An Intertemporal World Model," Journal of Policy Modeling, Elsevier, vol. 22(5), pages 557-588, September.
    2. Bergstrand, Jeffrey H, 1985. "The Gravity Equation in International Trade: Some Microeconomic Foundations and Empirical Evidence," The Review of Economics and Statistics, MIT Press, vol. 67(3), pages 474-481, August.
    3. I-Hui Cheng & Howard J. Wall, 2005. "Controlling for heterogeneity in gravity models of trade and integration," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 49-63.
    4. Alan Deardorff, 1998. "Determinants of Bilateral Trade: Does Gravity Work in a Neoclassical World?," NBER Chapters,in: The Regionalization of the World Economy, pages 7-32 National Bureau of Economic Research, Inc.
    5. Soloaga, Isidro & Alan Wintersb, L., 2001. "Regionalism in the nineties: what effect on trade?," The North American Journal of Economics and Finance, Elsevier, vol. 12(1), pages 1-29, March.
    6. Endoh, Masahiro, 1999. "The transition of postwar Asia-Pacific trade relations," Journal of Asian Economics, Elsevier, vol. 10(4), pages 571-589.
    7. Fritz Breuss & Peter Egger, 1999. "How Reliable Are Estimations of East-West Trade Potentials Based on Cross-Section Gravity Analyses?," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 26(2), pages 81-94, June.
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    9. Helpman, Elhanan, 1987. "Imperfect competition and international trade: Evidence from fourteen industrial countries," Journal of the Japanese and International Economies, Elsevier, vol. 1(1), pages 62-81, March.
    10. Limao, Nuno & Venables, Anthony J., 1999. "Infrastructure, geographical disadvantage, and transport costs," Policy Research Working Paper Series 2257, The World Bank.
    11. Arie Arnon & Avia Spivak & J. Weinblatt, 1996. "The Potential For Trade Between Israel, The Palestinians and Jordan," The World Economy, Wiley Blackwell, vol. 19(1), pages 113-134, January.
    12. Egger, Peter, 2000. "A note on the proper econometric specification of the gravity equation," Economics Letters, Elsevier, vol. 66(1), pages 25-31, January.
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    More about this item

    Keywords

    Gravity equation; panel data; infrastructure; integration;

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

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