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An application of the gravity model

The final estimated model has strong explanatory power, with all variables significant at the 5% level. The aim is to forecast the impact of potential Brexit scenarios on the export volume of passenger cars from Germany to the UK. The level of tariffs is found to have the most significant effect. The greatest pessimistic scenario for 2030 forecasts is a reduction of 15.4% compared to the ‘no Brexit’ base-case scenario. Read this article about an application of the gravity model.

 

Introduction

An application of the gravity model: The UK Government has formally appealed Article 50 of the Lisbon agreement of the EU on March 30th, 2017. The UK held a referendum on continued membership of the EU on June 23rd, 2016. Brexit is a relatively new phenomenon; the literature already contains works on the overall Brexit and referendum. Authoritative sources suggest that there are three long-term scenarios that might emerge as outcomes from the UK’s Brexit negotiations with the EU. This would mean that the free movement of goods, capital, services, and people would continue. Although the UK could not take part in someone requires future decision-making processes within the EU. This agreement has suited smaller countries such as Norway, Iceland, and Liechtenstein.

 

An application of the gravity model: The gravity model

The gravity model estimates bilateral trade flows where trade positively relates to the level of GDP of the trading partners. There is minimal agreement something should include which variables in the gravity equation. The gravity model has gained in popularity in the empirical trade literal something should include variables. Besides the conventional standard version of the model, something can make several modifications and dummy variables added. Variations someone has applied which to resolve several issues include the use of non-linear OLS.

An application of the gravity model

Selection of variables and data collection

An application of the gravity model: Data on the export and import quantities of passenger cars from the country I to country j was collected from the Comrade database. It extracted data using the 4th version of the Harmonized Commodity Description and Coding System. Some countries do not report data at lower commodity code levels. The Comrade database provides information on the quantity, weight, and value of a trade. Something based the total quantities on the merged amount for all countries and not what the database refers to as “world” totals. Someone took an average for those situations where there were differences between reported exports.

 

GDP and population

An application of the gravity model: They include GDP in the model because the GDP of an exporting nation measures its productive capacity. The potential for economies of scale suggests that the larger the population, the more efficient is market production. Bergstrand argues that this relationship is present in both the supply structure. In using this source, they should recognize it that the World Bank relies on international and regional sources such as the United Nations.

 

An application of the gravity model: The forecasting model

As commonly applied in the forecasting of demand or production it used a double-logarithmic technique to convert the final gravity model to a constant elasticity to facilitate an econometric analysis. The sample dataset comprises all countries to which Germany exported over 1000 units in the designated year and for which data were available. It used the estimated coefficients for the 2015 gravity model in the forecasting model.

 

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