Evaluating Trade between India and North America using Gravity
Models
The theoretical foundations of gravity models: Newton’s Law The model has been adapted from Newton’s laws of
gravitation Statistically measure bilateral trade flows between
different geographical entities or regions In the simplest gravity model, bilateral trade flows
between two countries are assumed to be proportional to the product of their gross domestic products
and inversely proportional to a measure of the distance between them
The Two FrameworksThe Gravity Model
F = K×GDPi×GDPj d2
F = The Flow of Trade
GDPi = GDP of country i GDPj = GDP of country j d = distance between
economic capitals of countries i and j
(sometimes measured by ports).K = is a constant.
The Newton Model
F = G×m1×m2
r2
F = The force of attraction m1 = mass of object 1 m2 = mass of object 2 r = the distance G = is a constant.
Estimated gravity equation Newton’s Law-based Normal Trade Normal trade The basic equation depend upon two major
variables: GDP and distance Positive correlation of trade to GDP and
negative correlation with distance
ln (Tradeij) = C + a ln(GDPi) + b ln(GDPj) + +c ln(distanceij) + uij
“Augmenting” the gravity equations
Income per capita (higher income countries trade more)
Adjacency Common language, colonial links Institutions, infrastructures, labour flows,... Surprisingly, bilateral tariff barriers often
missing!!!
“Augmenting” gravity model Traditional approach to evaluate the impact of
RTAs: Trade creation and trade diversion
ln (Tradeij) = a ln(GDPi) + b ln(GDPj) + +c ln(distanceij, ,adjacency, language ..) + d (Dummy i) +
+ e (Dummy j) + g (intra-RTAij)+ h (extra-RTAij) + uij
IMPORTANT the gravity model does not estimate welfare effects
North America
GDP & Distance GDP is used to determine the size of the country The more the GDP, the more the trade India’s GDP is tenth largest in the world India’s trade with larger economies is more Distance between India and North America is
high High distances convert to high freight and
transportation cost
Common Language Dummy variable which was augmented
on the Gravity Model We took binary variable i.e. 0 and 1
values for having a common language with India
Perception is that common language increases trade between nations
Population & Area Higher population translates to more
trade
Methodology Data has been taken from 2003 to 2010 Demographic and GDP data :
WorldBank Distances data: WorldAtlas Trade data: WITS Multiple regression using SPSS Data available only for 19 out of 23
countries
The Output Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1 0.888385 0.789228 0.782317 1.149847
a. Predictors: (Constant), Population, GDP_India, Distance, Area, Language, GDP
ANOVAbModel Sum of Squares df Mean Square F Sig.
1 Regression 905.9843 6 150.9974 114.2061 0Residual 241.953 183 1.322148Total 1147.937 189
a. Predictors: (Constant), Population, GDP_India, Distance, Area, Language, GDPb. Dependent Variable: Export
The Output Coefficientsa
Model Unstandardized Coefficients
Standardized Coefficients
t Sig.
Std. Error Beta
1 (Constant) 16.76 17.78 0.94 0.35
GDP 0.12 0.05 0.14 2.30 0.02
GDP_India 1.33 0.20 0.22 6.56 0.00
Area 0.55 0.05 0.67 10.41 0.00
Language 0.16 0.28 0.03 0.58 0.56
Distance -6.04 1.71 -0.18 -3.53 0.00
Population 0.03 0.04 0.04 0.80 0.42a. Dependent Variable: Export
Language and Population are not significant
The OutputModel Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
Change Statistics
R Square Change F Change
1 0.887876 0.7883 0.783747 1.146065 0.788324 172.2439
a. Predictors: (Constant), Distance, GDP_India, GDP, Area
ANOVAbModel Sum of Squares df Mean Square F Sig.
1 Regression 904.946 4.000 226.237 172.244 0.000
Residual 242.991 185.000 1.313
Total 1147.937 189.000
a. Predictors: (Constant), Distance, GDP_India, GDP, Areab. Dependent Variable: Export
The OutputCoefficientsa
Model Unstandardized Coefficients
Standardized Coefficients
t Sig. Collinearity Statistics
Std. Error Beta Tolerance VIF
1 (Constant) 28.108 12.651 2.222 0.028
GDP 0.144 0.043 0.172 3.312 0.001 0.425 2.354
GDP_India1.318 0.202 0.223 6.539 0.000 0.988 1.013
Area 0.538 0.043 0.653 12.508 0.000 0.420 2.379
Distance -6.457 1.140 -0.197 -5.663 0.000 0.950 1.053
a. Dependent Variable: Export
The Equation
Thank You!