The Gravity Model in International Trade Theory

The Gravity Model is a relatively new model in international trade theory. According to the Model, bilateral trade flows between countries can mainly be explained by their GDP sizes and transportation costs which are varied by the geographical distance between them. The frame of the Gravity Model allows for the testing of the effects of multilateral/bilateral trade agreements and regional integrations on international trade. It also allows for the testing of some social and cultural elements such as the similarity of legal and institutional structure of the countries, common language, and the waiting time for bureaucratic transactions. All of these elements have some effect on the volume of trade flows and the Gravity Model makes it possible to model these elements in the framework of the international trade theory. There are various studies in the related literature which estimate the total effect of transportation costs and trade barriers while some others estimate the trade between blocks as well as the intra-block trade. Most of the results of these studies are consistent which increases the reliability of the model.