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

Author

Listed:
  • Inmaculada Martínez-Zarzoso

    (Ibero-America Institute for Economic Research of the University of Goettingen)

  • Felicitas Nowak-Lehmann D.

    (Ibero-America Institute for Economic Research of the University of Goettingen)

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.

Suggested Citation

  • Inmaculada Martínez-Zarzoso & Felicitas Nowak-Lehmann D., 2003. "Augmented gravity model: An empirical application to Mercosur- European trade flows," International Trade 0309019, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpit:0309019
    Note: Type of Document - Acrobat PDF; pages: 23 ; figures: none
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    References listed on IDEAS

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    More about this item

    Keywords

    Gravity equation; panel data; infrastructure; integration;
    All these keywords.

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

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