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

  • 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)

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.

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File URL: http://128.118.178.162/eps/it/papers/0309/0309019.pdf
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Paper provided by EconWPA in its series International Trade with number 0309019.

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Length: 23 pages
Date of creation: 10 Sep 2003
Date of revision:
Handle: RePEc:wpa:wuwpit:0309019
Note: Type of Document - Acrobat PDF; pages: 23 ; figures: none
Contact details of provider: Web page: http://128.118.178.162

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  1. Fritz Breuss & Peter Egger, 1999. "How Reliable Are Estimations of East-West Trade Potentials Based on Cross-Section Gravity Analyses?," Empirica, Springer, vol. 26(2), pages 81-94, June.
  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 474-81, August.
  3. Egger, Peter, 2000. "A note on the proper econometric specification of the gravity equation," Economics Letters, Elsevier, vol. 66(1), pages 25-31, January.
  4. Alan V. Deardorff, 1995. "Determinants of Bilateral Trade: Does Gravity Work in a Neoclassical World?," NBER Working Papers 5377, National Bureau of Economic Research, Inc.
  5. 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.
  6. Shang-Jin Wei, 1996. "Intra-National versus International Trade: How Stubborn are Nations in Global Integration?," NBER Working Papers 5531, National Bureau of Economic Research, Inc.
  7. Anderson, James E, 1979. "A Theoretical Foundation for the Gravity Equation," American Economic Review, American Economic Association, vol. 69(1), pages 106-16, March.
  8. Soloaga, Isidro & Winters, L. Alan, 1999. "Regionalism in the Nineties: What Effect on Trade?," CEPR Discussion Papers 2183, C.E.P.R. Discussion Papers.
  9. Limao, Nuno & Venables, Anthony J., 1999. "Infrastructure, geographical disadvantage, and transport costs," Policy Research Working Paper Series 2257, The World Bank.
  10. 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, 01.
  11. 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.
  12. 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.
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