A Critique of the Gravitational Model in Estimating the Determinants of Trade Flows

Abstract

Research pertaining to variables that are capable of influencing trade flows has undergone a different econometric evolution if compared to other macroeconomic variables. The analysis of economic literature in this field, especially in reference to a technical approach (i.e. utilizing a co- integration or a VAR approach), has rather focused on a systemic study. In this context, the gravitational model has revolutionized the econometric process of analysis of the determinants of trade flows, highlighting numerous improvements. However, although this model is capable of also explaining international trade between economies of scale, it has always (in an econometric perspective) automatically accepted the value of the intercept as the result of the difference between Y – s1X1. This paper, after having defined the variables that are capable of influencing trade flows, will suggest a different method of econometric calculation of the gravitational model.

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