Gravity models and the Law of Large Numbers

Colin Jareb and Sergey Nigai

Economics Letters, 2022, vol. 221, issue C

Abstract: This paper examines the implications of uncertainty in gravity models of trade due to the violation of the Law of Large Numbers (LLN) that we document in the data. When the number of available technologies is finite and the LLN does not hold, the variance of the stochastic component in gravity models is large, which leads to the poor goodness of fit of gravity models and high uncertainty in comparative statics results. We offer a procedure that specifies counterfactual predictions in terms of distributions rather than point estimates and helps to account for such uncertainty.

Keywords: Trade gravity; Law of Large Numbers; Hat algebra; Gains from trade (search for similar items in EconPapers)
JEL-codes: F1 F14 F17 F6 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Gravity Models and the Law of Large Numbers (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:221:y:2022:i:c:s0165176522003858

DOI: 10.1016/j.econlet.2022.110911

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