DP9322 Gravity Equations: Workhorse, Toolkit, and Cookbook

Author(s): Keith Head, Thierry Mayer
Publication Date: January 2013
Keyword(s): bilateral, gravity, trade
JEL(s): F1
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9322

This chapter focuses on the estimation and interpretation of gravity equations for bilateral trade. This necessarily involves a careful consideration of the theoretical underpinnings since it has become clear that naive approaches to estimation lead to biased and frequently misinterpreted results. There are now several theory-consistent estimation methods and we argue against sole reliance on any one method and instead advocate a toolkit approach. One estimator may be preferred for certain types of data or research questions but more often the methods should be used in concert to establish robustness. In recent years, estimation has become just a first step before a deeper analysis of the implications of the results, notably in terms of welfare. We try to facilitatediffusion of best-practice methods by illustrating their application in a step-by-step cookbook mode of exposition.