The Gravity Equation in International Economics and International Business Research: A Note
14 Pages Posted: 6 Aug 2010
Date Written: August 4, 2010
This note discusses methodological issues and practical concerns for international economists and international business scholars who apply the gravity equation in their research. The most important message of the note is that this equation should correct for multilateral resistance factors. We propose a relatively low-cost specification and estimation to implement such correction, which is robust in the presence of various endogeneity effects and non-stationary variables. In the presence of zero-values in the dataset, however, the multilateral specification is best estimated with a Poisson maximum likelihood.
Keywords: gravity equation, international trade, foreign direct investment, methodology
JEL Classification: C1, F1, F2
Suggested Citation: Suggested Citation