On the relevance of gravity model in the new institutional environment
Keywords:gravity model, globalization, impediments to trade, nontariff barriers, institutional factors
International trade enables economies to gain specific advantages of trade. Theory of international trade is anchored on several key concepts. The first is the concept of comparative advantage. The size of international trade is frequently measured with the use of the gravity model. According to this model, countries trade with each other based on the size of their GDP and population. Another motivation supporting trade is the cultural affinity, institutional support and physical proximity. Deteriorating influence on the extent of mutual trade is traditionally expressed by increased geographical distance and trade impediments. In this paper we discuss the general validity of the model, taking in consideration new communication technology and new ways of transport and quality of institutions. We also discuss the issue of barriers to trade and we especially focus on the existing non-tariff barriers that are inhibiting the trade and we investigate how they can be included in to gravity model.
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