Future Prospects of the Gravity Model of Trade: A Bibliometric Review (1993–2021)
| Published date | 01 February 2024 |
| DOI | http://doi.org/10.1177/00157325221140154 |
| Author | Suhas Jadhav,Ishita Ghosh |
| Date | 01 February 2024 |
| Subject Matter | Articles |
Future Prospects of the
Gravity Model of Trade:
A Bibliometric Review
(1993–2021)1
Suhas Jadhav1 and Ishita Ghosh1
Abstract
The gravity model of trade (GMoT) has become popular among practitioners
and academics lately, essentially because of its power to provide a comprehen-
sive explanation of real-world trade data. Complementing this are Viner’s con-
cepts of trade creation (TC) and trade diversion (TD), which have been crucial in
the development of a conceptual framework for evaluating the trade implications
of a trade agreement. This article attempts to conduct a bibliometric analysis for
estimating TC and TD using the GoMT. It has been observed that the TC and TD
estimations following the use of the GoMT are few. Additionally, TC and TD esti-
mations for free trade agreements (FTA) have been conducted, but not so much
for regional trade agreements (RTA). As a result, a broad range of research can
be conducted, especially given the recent dynamic environment for new RTAs.
A bibliometric analysis was undertaken to evaluate the current level of research
on GMoT. The search was conducted through Scopus where 648 documents
were retrieved and examined. The article indicates key findings and discusses
future research prospects.
JEL Codes: F10, F13, F14
Keywords
Free trade agreement, regional trade agreement, trade creation, trade diversion,
gravity model of trade, bibliometric studies
Article
1 Symbiosis School of Economics (SSE), Symbiosis International (Deemed University) (SIU), Pune,
Maharashtra, India
Corresponding author:
Suhas Jadhav, Symbiosis School of Economics, Symbiosis International (Deemed University) (SIU),
S. B. Road, Shivaji Nagar, Pune, Maharashtra 411004, India.
E-mail: suhas.jadhav@sse.ac.in
Foreign Trade Review
59(1) 26–61, 2024
© 2023 Indian Institute of
Foreign Trade
Article reuse guidelines:
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DOI: 10.1177/00157325221140154
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Jadhav and Ghosh 27
Introduction
In the last four decades, the gravity model of trade (GMoT) has earned a name for
itself and is considered a workhorse in the field of applied international trade.
It aids in assessing the influence of policies on actual trade between nations,
which makes it quite popular among policymakers and researchers (Shephard,
2016). Numerous empirical studies evaluating trade agreements are available,
too, owing to the increasing number of trade agreements and the access to high-
quality trade data for both, developed and developing countries.
The papers by Tinbergen (1962) and Pöyhönen (1963) are rudimentary and
deal with very early versions of the gravity model. Anderson makes the first
attempt to provide a theoretical understanding of the gravity model (1979). His
theory is founded on the Armington premise, which states that every nation
has the potential to engage in trade; all goods are tradable, and national income
is equal to domestic and overseas consumers’ demand a nation’s products.
Consequently, large nations export and import more than small nations.
Researchers demonstrated a connection between trade theories and the gravity
model. Bergstrand’s (1985, 1989) research demonstrates the connection between
the gravity model and the trade model developed by Krugman (1979), which is
based on monopolistic competition and the fact that nations with comparable eco-
nomic sizes trade more with each other due to consumers’ desire for variety in
products. Similar to Deardorff’s (1998) explanation of the gravity model from
trade’s factor-proportions, Eaton and Kortum’s (2002) derivation from the
Ricardian model, and Chaney’s (2008) and Helpman’s et al. (2008) trade model
with differentiated goods and firm heterogeneity, numerous studies attempted to
link gravity model with other trade theories.
By the start of the new millennium, Feenstra (2003, 2004), Feenstra et al.
(2001) and Anderson and van Wincoop (2003, 2004) had made significant contri-
butions to the field of GMoT. The study of Anderson and van Wincoop (2003) is
one of the most seminal contributions in this field, as it fundamentally altered how
scientists estimate the gravity equation. According to them, the absence of MRTs
in the gravity equation produces biased and misleading results because these are
unobserved factors that may correlate with independent variables such as dis-
tance. To estimate the theoretically consistent gravity equation, the existing litera-
ture provides some intriguing techniques, such as the use of price indices of all the
nations in a dataset (Baier & Bergstrand, 2007), non-linear least squares (Anderson
& van Wincoop, 2003) and country-specific dummies like exporter and importer
fixed effects (Baier & Bergstrand, 2007; Hayakawa & Yamashita, 2011). The
most frequently acknowledged way for addressing the issue of MRTs in gravity
equation is the last method described above. This led to the inclusion of MRTs in
subsequent GMoT-related investigations.2 What Anderson and van Wincoop
(2003) refers to as MRTs, Baier and Bergstrand (2007) refer to as remoteness.3
The difficulty with using remoteness in the gravity equation is that it is theoreti-
cally inconsistent since it takes into account only distance as a trade barrier and
ignores other trade barriers and the inconsistency of estimating the internal dis-
tance of a country. The answer to this problem is the application of Taylor series
expansion of the first order, which is a linear approximation of MRTs instead of
28 Foreign Trade Review 59(1)
following the traditional non-linear process proposed by Anderson and van
Wincoop (2003). This demonstrates that trade between the reporter and the part-
ner countries is based on bilateral trade costs compared to multilateral trade costs,
and multilateral trade costs compared to global trade costs.
The GMoT is regarded as particularly adaptable. As a result, researchers modi-
fied it to meet their needs. Recent research employing intra-nation trade as a vari-
able in GMoT is a good example (Piermartini & Yotov, 2016). The variable helps
in understanding the effect of non-discriminatory policies like trade facilitation on
applied researchers. The literature on GMoT is undergoing rapid change as a
result of numerous developments and modifications, such as the one indicated
above. Hence, it is becoming considerably difficult to identify the current `body
of knowledge and its advancements. Bibliometric analyses are capable of absorb-
ing a large amount of data and producing incredibly informative results such as
thematic evolution, trending topics, tracing shifts in the research domain, evolu-
tion of concepts, the influence of an individual or group of individuals on the
research field, and collaboration between authors, countries and institutions
(Crane, 1972).
The basic gravity equation is based on two variables like GDP and distance,
where the former is a proxy for the economic size of the nations and the latter is
the geographical distance between two countries, which relates to the cost of
bilateral trade. Tinbergen (1962) and Pöyhönen (1963) used these factors to
explain why countries with almost the same GDP trade a lot with each other but
trade less with countries that are far away from each other. With time, GMoT
gained a foothold in applied international trade, more and more variables were
added to further enhance GMoT’s ability to estimate. Endoh introduced the ‘pop-
ulation’ variable in 1999 and 2000, which has a considerable impact on trade flow.
The population of an exporting/importing country has a negative/positive impact
on the exporter nation’s export. The level of economic development is yet another
important variable that has a large and beneficial impact on trade flow. As a result,
the researchers devised a proxy for economic development, that is per capita
income in GMoT (Elliott & Ikemoto, 2004; Frankel et al., 1995). The appreciation
or depreciation of a nation’s currency also has a substantial effect on its trade flow.
That is, the depreciation of an exporter’s currency aids in increasing its exports to
other countries, whereas the appreciation of an importer’s currency aids in import-
ing goods that are either not produced domestically or are of poor quality. As a
result, studies began incorporating the ‘exchange rate’ variable into their analyses
(Kaushal, 2022). There have been recent GMoT studies that include more sophis-
ticated variables like ‘intra-nation trade’, as well as a trade policy variable, which
is further divided into two categories: tariff barriers and non-tariff barriers. Tariff
barriers include the most favoured nations, and non-tariff ones include technical
barriers to trade (TBT), sanitary and phytosanitary measures, non-automatic
licencing measures and pre-shipment inspection, etc. (Heid et al., 2021). While
experts have pointed out some key limitations of the model, with time various
solutions have also been offered (Appendix I).
The gravity model has always been empirically insightful; however, while the
results from the model were consistent with the data, it lacked a solid theoretical
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