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An International Trade Flow Model with Substitution: An Extension of the Gravity Model
Author(s) -
BIKKER JACOB A.
Publication year - 1987
Publication title -
kyklos
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.766
H-Index - 58
eISSN - 1467-6435
pISSN - 0023-5962
DOI - 10.1111/j.1467-6435.1987.tb00683.x
Subject(s) - gravity model of trade , economics , extension (predicate logic) , variety (cybernetics) , flow (mathematics) , substitution (logic) , econometrics , international trade , computer science , mathematics , geometry , statistics , programming language
SUMMARY The traditional gravity model has often been applied to international trade flows, especially to analyze trade creation and trade diversion. However, there are two fundamental objections to the model: it cannot describe substitutions between flows, and it lacks a cogent theoretical foundation. A newly developed model, the Extended Gravity Model (EGM), overcomes these objections. An empirical test strongly rejects the gravity model in favour of the EGM. The empirical analysis also proves that the gravity model widely overestimates the influence of the determinants of international trade. The EGM encompasses several models originating in regional economics, and can be applied usefully to a variety of subjects.