Sensitivity of International Blocs' Trade Effect to Alternative Specifications of the Gravity Equation

Abstract

There are so many versions of the gravity model in the international trade literature that their results on trade effects inevitably vary even for the same international blocs. This paper evaluates these alternative specifications, and compares the resulting trade effects. The results show that there is considerable sensitivity to the specification of the gravity model used. Therefore, it is important to use the proper specification to accurately measure the trade effects. This paper suggests that removing restrictions on the parameters of the model with the introduction of year, exporter, importer, and bilateral effects is necessary to properly specify the model. In particular, factors included in the augmented model, especially monetary and spatial variables, are significant. An analysis of the resulting model also shows that international blocs effect on trade vary across blocs by the level of integration, the degree of their implementation, and their sectoral coverage.

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