Assignments
Gravity Model
• References:
• International Economics by Krugman, Obstfeld and Melitz (12 th Ed)
• Advanced International Trade, 2nd Ed, by Feenstra. Chapter 5
• Rose, Andrew K. “One Money, One Market: Estimating the Effect of
Common Currencies on Trade” Economic Policy, 2000, (30), pp. 7-45.
Read the NBER working paper version available here:
https://www.nber.org/papers/w7432.pdf
• Richard Baldwin & Daria Taglioni, 2006. "Gravity for Dummies and
Dummies for Gravity Equations," NBER Working Papers 12516:
https://www.nber.org/papers/w12516.pdf
Trading Partners
Gravity Model
• Main idea
• Modified equation
• If a, b, c = 1, we would have the main equation
• Often, the regression results indicate an outcome of a, b, c = 1
• Sometimes, other factors play a role
• Interpretation of GDPs
Gravity Equation: Modified, Log form
• Log form
𝐿𝑜𝑔 𝑇𝑖𝑗 = 𝐿𝑜𝑔𝐴 + 𝑎 𝐿𝑜𝑔𝑌𝑖 + 𝑏 𝐿𝑜𝑔𝑌𝑗 − 𝑐 𝐿𝑜𝑔 𝐷𝑖𝑗
• Minor changes make this a regression equation (constant is not in log
form, add error term, no negative symbol)
• Hypotheses
• Coeffs a and b are positive and significant
• Coeff c is negative and significant
Extending the Gravity Model
• Barriers to bilateral trade
• Enablers of bilateral trade
• Add your own variable and the corresponding hypothesis.
Borders have a large effect on trade
Option 1: Assignment Based on Gravity Model
1. Understanding Gravity model
a. Log of bilateral trade between country i and j = f(Log of GDPi, Log of GDPj, Log of
Distance between i and j)
2. Test the Gravity Model using the steps outlined below.
3. Locate bilateral exports data (world bank or OECD or any other source). Note that there
are three dimensions in the data – time, country i, country j (Hint: Avoid imports and
total trade)
4. Select your sample (list of countries and time frame). Aim for a sample size of more
than 1000. (Hint: it might be easier to stick to total exports, instead of focusing on
specific sectors or commodities)
Assignment Based on Gravity Model
4. Your dependent variable is Y = exports from country i to j
a. If you have many zero values, add 1 and then calculate the log of exports
5. Independent variables
a. Collect and merge the data GDP of the countries (for both i and j) (Hint: use nominal values)
b. Find the bilateral distance data for your sample size. Hint: One possible source of data
http://www.cepii.fr/cepii/en/bdd_modele/bdd.asp
c. Think of at least one other determinant of bilateral trade and add them to the regression
model. The rationale behind this variable must be explained in the paper.
Assignment Based on Gravity Model
6. Present the summary statistics
7. Test if the Gravity Model holds using Pooled OLS model. (Other econometric techniques are
optional)
8. Write a short report with a short introduction, regression equation(s) depicting the model,
description of your data, summary statistics, regression results, interpretation of the results and
conclusion. The regression results tables must be formatted on the lines of a typical economics
journal article. There is no word limit.
Assignment Based on Gravity Model
• Deadlines:
• February 6: Deadline for steps 1 to 5 + extra variable: Email your list of countries, time frame and
extra variable
• February 13: Complete merging of all the variables
• February 20: Deadline for steps 6 to 8: Discuss the summary statistics and regression results in
scheduled office hours.
• Midterm week: Deadline for final report. Include plagiarism report.
• Note: Late penalty will be applicable for late submission
Assignment Based on Gravity Model
• In case you are interested in expanding this project for a future publication, then you need to
work on creating an innovative idea for the extra variable and establish that it is not covered in the
literature already.
• Avoid Excel. Practice doing the work in STATA or R. Learn how to clean and merge data before
regression
Option 2: Critical Review Assignment
• Choose any topic on International Trade
• Find 3 papers on that topic, and do a critical appraisal of those papers
• Supportive evidence for the points of critique is essential.
• It is possible to write the critique sequentially, or simultaneously or
both.
• Hint: Do a literature search to obtain about a dozen papers on the
topic. Use three for critique and rest for support evidence.
Option 2: Critical Review Assignment
• Deadlines:
• February 6: Finalize topic, identify papers
• February 20: Outline of points of summary and critique
• Midterm week: Deadline for final paper. Include plagiarism report.
• Note: Late penalty will be applicable for late submission
