An extended gravity model with substitution applied to international trade

Jacob Bikker ()

DNB Working Papers from Netherlands Central Bank, Research Department

Abstract: 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.          Â

Keywords: bilateral trade; imports; exports; spatial allocation; trade creation; trade         diversion; distance; market access; supplier access; multilateral resistance terms;    remoteness indices.           (search for similar items in EconPapers)
JEL-codes: F1 R12 (search for similar items in EconPapers)
Date: 2009-07

Downloads: (external link)
http://www.dnb.nl/binaries/Working%20paper%20No_tc ... 009_tcm46-220405.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 /binaries/Working paper No_tcm46-220405. 215-2009_tcm46-220405.pdf

Related works:
Working Paper: An extended gravity model with substitution applied to international trade (2009)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:dnb:dnbwpp:215

Access Statistics for this paper

More papers in DNB Working Papers from Netherlands Central Bank, Research Department
Contact information at EDIRC.
Series data maintained by Arjen Siegmann ().