The Gravity Model and Regional Integration Agreements

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The Gravity Model and Regional Integration
Agreements

• The gravity model (GM) and its theoretical
  foundation
• Using GM to measure RTA effects
• Empirical difficulties and some results

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The Gravity Model
Resemble the law of gravity in physics ? We
explain attraction with mass and distance
Empirical success story with few explanatory
variables
? Very useful for policy evaluations
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How to derive the GM

• Two important building blocks
• All goods are differentiated by place of origin
• Identical preferences across countries
• ? The work horse model New Trade Theory

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Supply

• Firms
• Economies of scale
• Differentiated products
• Monopolistic competition

Each firm gather its resources in one location
(due to EoS) and choose to produce a unique
variety in order to reap market power.
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Demand

• Consumers
• Love variety
• Homothetic preferences
• Identical across countries

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? The gravity model
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From none to several theoretical foundations
GM
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GM and RTA-effects
How do we capture RTA-effects? tij f(distance,
cultural, language, , trade agreements)
distance dummy for cultural dummy for RTA

• RTA questions in a GM-specification
• Regional bias
• Trade creation or diversion
• Trade potential
• Domino effects

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Four empirical questions

• RTA-effects
• ? captured by a set of dummies
• Compare the general propensity to import and
  export of RTA-members with their propensity to
  trade with each other.
• Note Dummies are sensitive for misspecification.

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The norm Which countries are included in our
regression but not in the RTA?
Multilateral trade resistance Unobservable that
has to be approximated ? Importer and exporter
dummies
Zero trade log(0) impossible Exclude zeros,
log(mij 1), non-linear estimation Zero trade
flows indicate selectivity problems
(Heterogeneous firms in NTT or HO-model
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RTA in Western Africa
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• Three dummy variables in order to estimate
  RTA-effects
• Intra-bloc trade (IBT)
• 1 if both importer and exporter belong to UEMOA
• Importer from all countries (IMP)
• 1 if importer belongs to UEMOA
• Exporter to all countries (EXP)
• 1 if exporter belongs to UEMOA

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The effects of RTA on trade flows (Carrère, 2006)

• Trade effects of the seven RTAs since the 1960s
• EU, ANDEAN, ASEAN, CACM, LAIA, NAFTA, MERCOSUR

• Measures RTA-effects with three dummies
• Propensity of members to import from all
  countries
• Propensity of members to export to all countries
• Propensity to trade with other members

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Average effects
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Results the EU
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Results MERCOSUR
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Results NAFTA