The estimation of gravity models in international trade

Abstract

Over the last few decades, multi-indexed data on trade, multinational activity, and even migration have become available. By far the most prominent application of multi-dimensional data in the context of international economics is the estimation of the famous gravity equation of international trade, where bilateral export or import volume (or foreign direct investment stock or migration stock) is the dependent variable of interest. This chapter provides a survey of empirical issues in gravity-model estimation from a panel econometric perspective. It sets off with a generic illustration of the theoretical foundations of gravity equations and proceeds with the modelling of the multi-dimensional stochastic structure, focusing on fixed-effects estimation.