The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Gravity Equation

  • Robert C. Feenstra
Reference work entry
DOI: https://doi.org/10.1057/978-1-349-95189-5_1995

Abstract

The gravity equation explains the amount of trade between countries based on their economic sizes and the distance between them. While it has been in use since the 1960s, its theoretical foundation has been known for a much shorter period, and recent years have seen an large amount of research on its derivation and estimation. We review the theoretical and empirical literature on the gravity equation. In addition to explaining the amount of trade, this equation has been applied to foreign direct investment, the volatility of prices, and the impact of currency unions and free trade areas.

Keywords

Border effects Constant-elasticity-of-substitution (CES) preferences Currency unions Distance Elasticity of substitution Estimation Euro Fixed effects Foreign direct investment Gravity equation International trade Monopolistic competition Poisson distribution Product differentiation Selection equation Specialization Transport costs World Trade Organization 
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Notes

Acknowledgment

The author would like to thank Keith Head for his very helpful comments.

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Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Robert C. Feenstra
    • 1
  1. 1.