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

Inmaculada Martínez-Zarzoso and Felicitas Nowak-Lehmann D.
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Felicitas Nowak-Lehmann D.: Ibero-America Institute for Economic Research of the University of Goettingen
Authors registered in the RePEc Author Service: Felicitas Nowak-Lehmann D.

International Trade from EconWPA

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.

Keywords: Gravity equation; panel data; infrastructure; integration (search for similar items in EconPapers)
JEL-codes: F14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec
Date: 2003-09-10
Note: Type of Document - Acrobat PDF; pages: 23 ; figures: none
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