Controlling for Heterogeneity in Gravity Models of Trade and Integration

I-Hui Cheng, Howard J. Wall
2005 Review  
been common to instead specify the augmented model using per capita income, which captures the same effects. 3 Whichever specification of the augmented model is used, the purpose is to allow for non-homothetic preferences in the importing country and to proxy for the capital/labor ratio in the exporting country (Bergstrand, 1989 ). The gravity model of trade has been used widely as a baseline model for estimating the impact of a variety of policy issues, including regional trading groups,
more » ... cy unions, political blocs, patent rights, and various trade distortions. 4 Typically, these events and policies are modeled as deviations from the volume of trade predicted by the baseline gravity model and, in the case of regional integration, are captured by dummy vari-3 Examples of the augmented model with per capita income include NOTE: All non-dummy variables are in logs. White-corrected standard errors are in parentheses; * and † denote significance at the 5 and 10 percent levels, respectively. For the DFE model, all variables are in differences from the previous year. Cheng and Wall 6 2 J A N UA RY / F E B R UA RY 2 0 0 5
doi:10.20955/r.87.49-64 fatcat:vdlwpz5idjgghnbz6nnc24m3gm