The Gravity Model of International Trade: A User Guide
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The gravity model is the workhorse of the applied international trade literature. It has been used in literally thousands of research papers and published articles covering all areas of trade. It is of particular interest to policy researchers because it makes it possible to estimate the trade impacts of various trade-related policies, from traditional tariffs to new “behind-the-border” measures. With data increasingly available for developing, as well as developed countries, the gravity model has come to be the starting point for a wide variety of research questions with a policy component. Although first put forward as an intuitive explanation of bilateral trade flows, the gravity model has more recently acquired a range of micro-founded theoretical bases. These approaches are important to policy researchers because they affect the data, specification, and econometric technique used to estimate the gravity model. Use of a theoretically-grounded gravity model can lead to substantially different results and interpretations from those obtained via a “naive” formulation, and high quality policy research and advice increasingly needs to be based on a rigorously established methodology...