The paper "Empirically Based Gravity Model" is a wonderful example of a report on macro and microeconomics. The gravity equation is the most empirically successful equation in economics (Anderson & Wincoop, 2001). It has been used regularly to estimate the impact of exchange rate volatility, border effects, and the impact of trade agreements between countries and regions. The gravity model relates to bilateral trade flows to GDP, distance, and other factors that affect trade barriers. It is used to deduce trade flow effects of exchange rates, custom unions, and global boundaries.
Economists have found out that after controlling for size, trade between two regions decreases in their bilateral trade barrier in comparison to the average barrier of the two regions to trade with all their partners. A region that is resistant to trade with all others is forced to trade with a given bilateral partner. Economic analysts call this theoretically appropriate average barrier the multilateral resistance. The gravity model was originally under disregard because it had no theoretical basics. There are two gravity models. One such model is the theoretically derived gravity model while the other is an empirically based gravity model.
Empirical gravity models do not have theoretical basics. Empirical gravity literature does not include any form of multilateral resistance in the analysis. It includes nontheoretical distance variables that are related to distance, to all bilateral associates. The model’ s remoteness index does not take into account any of the other trade obstacles that are the focus of analysis. This paper provides a critical examination of the superiority of the theoretically derived gravity model over the empirically-based gravity model. It also explains the inferences of the theoretically derived gravity model on applied econometric analysis of trade flows. The superiority of the Theoretically Derived Gravity Model over the Empirically Based Gravity Model Firstly, the theoretical gravity model is equipped with theoretical foundations.
These theoretical foundations equip the model with strong explanatory power. This has been the persuasive motivation for the model’ s usage. Trade economists have written papers that take the theory seriously, but the papers are usually viewed as contributions to narrow empirical topics such as the size of the border effect, or the level of the elasticity of a substation.
Anderson, J. E., & Wincoop, E. V. 2001. Gravity with Gravitas: A Solution to the Border Puzzle. Retrieved August 28, 2012, from https://www2.bc.edu/~anderson/BorderEffects.pdf
Anderson, J., & Wincoop, E. V. 2004, April 30. Trade Costs. Retrieved August 28, 2012, from http://fmwww.bc.edu/ec-p/wp593.pdf
Baier, S. L., & Bergstrand, J. H. 2005, February 15. Do Free Trade Agreements Actually Increase Members Iinternational Trade? Retrieved August 28, 2012, from http://www.frbatlanta.org/filelegacydocs/wp0503.pdf
Baldwin, R., & Taglioni, D. 2006, September. Gravity for Dummies and Dummies for Gravity Equations. Retrieved August 28, 2012, from http://www.nber.org/papers/w12516
Brun, J. F., Carrere, C., Guillaumon, P., & Melo, J. d. 2003, March 22. Has Distance Died? Evidence from a panel Gravity Model. Retrieved August 28, 2012, from http://www.cepr.org/meets/wkcn/2/2339/papers/deMelo.pdf
Bun, M. J., & Klaassen, F. J. 2002, March 27. The Importance of dynamics in Panel Gravity Models of Trade. Retrieved August 28, 2012, from http://dare.uva.nl/document/334911
Deardorff, A. 1998, January. Determinants of Bilateral Trade: Does Gravity Work in a Neoclassical World? Retrieved August 28, 2012, from http://www.nber.org/chapters/c7818.pdf
García, F. P., Tortosa, E., & Fernandez, I. 2009. The Distance Puzzle Revisited: A New Interpretation Based on Geographic Neutrality. Bilbao: University of Valencia Press.
Leamer, E. E., & Levinsohn, J. (1994, June). International Trade Theory: The Evidence. Retrieved August 28, 2012, from http://ideas.repec.org/p/nbr/nberwo/4940.html
McCallum, J. 1995, June. National Borders Matter: Canada-U.S. Regional Trade Patterns. Retrieved August 28, 2012, from http://www.jstor.org/stable/2118191
Medvedev, D. 2006. Preferential Trade Agreements and Their Role in World Trade. Washington, D.C: World Bank Publications.
Rose, A. K. 2004, March. Do We Really Know That the WTO Increases Trade? Retrieved August 28, 2012, from http://www.jstor.org/stable/3592771
Subramanian, A., & Wei, S.-J. 2006, July 25. The WTO promotes Trade, Strongly but Unevenly. Retrieved August 28, 2012, from http://www.imf.org/external/pubs/ft/wp/2003/wp03185.pdf