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Gravity Model Analysis Draft 2 Gravity Model Analysis 1



In recent years, the gravity model has become a "work horse " of quantitative studies of international trade and investment policy. 2 Essentially, the model uses econometric techniques to evaluate thousands of individual observations on trade and investment between countries over time, against the gravitational "mass " of explanatory variables that describe the characteristics of bilateral trade and investment partners. Two familiar explanatory variables are the joint real GDP levels of partners and the distance between them. But numerous other explanatory variables are frequently specified as well, including geographic, political, and institutional factors that either augment or diminish the gravitational forces giving rise to commerce between countries. Most important, recent gravity models incorporate indicators for bilateral and regional free trade agreements (FTAs), enabling the models to assess the contribution of FTAs to international commerce. The Gravity Model and Data Set The Peterson Institute gravity model (DeRosa 2007) is based on bilateral merchandise trade flows and inward stocks of foreign direct investment (FDI) among approximately 170 countries from 1976 to 2005 (with numerous gaps, mainly in the observations of bilateral FDI stocks), as compiled from the UN COMTRADE database (using the World Integrated Trade Solution of the World Bank) 3 and the UN Conference on Trade and Development FDISTAT database. 4 In the main, the numerous explanatory variables of the model, identified in Table 1, are taken from an extensive data set for gravity models compiled by Rose (2004).

Year: 2008
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