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Bilateral trade volumes, the gravity equation and factor proportions

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  • Andrzej Cieślik

Abstract

The gravity equation has been widely used in studying the determinants of bilateral trade flows. Despite their dubious theoretical foundations gravity models have been extremely successful empirically. All theoretical attempts to provide a formal justification for the gravity equation assume complete specialization in production. This leads to a misleading impression that complete specialization is a necessary condition for deriving the gravity equation. In this paper we demonstrate formally that the gravity equation can be derived also from a variety of incomplete specialization models based on both neoclassical and monopolistic competition assumptions. The common prediction that emerges from these models is that factor proportion variables, along with the country size variables, play a key role in determination of bilateral trade volumes, however, their impact is model specific. The neglect of these variables in empirical studies employing gravity equations derived from complete specialization models might result in estimates that suffer from the omitted variable bias if trading partners differ in terms of their relative factor endowments.

Suggested Citation

  • Andrzej Cieślik, 2009. "Bilateral trade volumes, the gravity equation and factor proportions," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 18(1), pages 37-59.
    • Handle: RePEc:taf:jitecd:v:18:y:2009:i:1:p:37-59
    DOI: 10.1080/09638190902757400
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    Citations

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    Cited by:

    1. Zacharias Sartzetakis & Grigoris Zarotiadis, 2013. "Using Gravity Models for the Effective Determination of Socioeconomic Locality: Local Labour Markets in Central Macedonia," South-Eastern Europe Journal of Economics, Association of Economic Universities of South and Eastern Europe and the Black Sea Region, vol. 11(2), pages 177-185.
    2. Gurshev Oleg, 2023. "Foreign direct investment and international trade across the former Soviet economies: What do we know after 30 years of research?," Journal of Economics and Management, Sciendo, vol. 45(1), pages 290-318, January.
    3. Oxana Babecká Kucharčuková & Jan Babecký & Martin Raiser, 2012. "Gravity Approach for Modelling International Trade in South-Eastern Europe and the Commonwealth of Independent States: The Role of Geography, Policy and Institutions," Open Economies Review, Springer, vol. 23(2), pages 277-301, April.
    4. Cardoso, B.F. & Rasetti, M. & Giampietri,E. & Finco, A. & Shikida, P.F.A., 2017. "Trade Dynamics in the Italian Floriculture Sector within EU Borders: A Gravity Model Analysis," AGRIS on-line Papers in Economics and Informatics, Czech University of Life Sciences Prague, Faculty of Economics and Management, vol. 9(2), June.
    5. Jelena Trivic & £ukasz Klimczak, 2015. "The determinants of intra-regional trade in the Western Balkans," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics and Business, vol. 33(1), pages 37-66.
    6. Andrzej Cieślik & Oleg Gurshev, 2022. "Friends with or without benefits? An empirical evaluation of bilateral trade and economic integration between some of the post-Soviet economies," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 12(4), pages 769-795, December.
    7. João Gilberto Mendes dos Reis & Pedro Sanches Amorim & José António Sarsfield Pereira Cabral & Rodrigo Carlo Toloi, 2020. "The Impact of Logistics Performance on Argentina, Brazil, and the US Soybean Exports from 2012 to 2018: A Gravity Model Approach," Agriculture, MDPI, vol. 10(8), pages 1-21, August.

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