Gravity Approach for Modeling Trade Flows between Estonia and the Main Trading Partners

Abstract

The advantages of using gravity approach for modeling transition processes in foreign trade are the ability of gravity models to explain international trade pattern under the conditions of comparatively little amount of data and validity of theoretical background of the model to the economies in transition. The both advantages are important when modeling transition processes. The results of the use gravity approach to explore international trade pattern of Estonia as a country with a small, open and comparatively successful transitional economy allow us to conclude that economies in transition should look for a regional niche to penetrate into the world market. Estonia has an excellent potential to develop trade relations within the Baltic Sea region countries. Estonia's situation is certainly not unique, and conclusions presented in this paper could be applied to analysis of international trade pattern in other economies in transition.

Keywords: Gravity Models, International Trade, Small Open Economy

JEL Classification: C5, F17, F47