Decomposing the Gains from Trade through the Standard Gravity Variables

International Economic Journal, Forthcoming

51 Pages Posted: 26 Feb 2020 Last revised: 18 Nov 2020

See all articles by HAKAN YILMAZKUDAY


Florida International University (FIU) - Department of Economics

Date Written: November 12, 2020


Using the implications of a trade model, this paper measures the gains from trade through the standard gravity variables. Theoretically, it is shown that such gains can be calculated by using the estimated coefficients of these variables in a gravity regression, together with the bilateral expenditure shares of countries investigated. Empirically, the results show that the total actual gains through all gravity variables in the world have increased from about 1% in 1950s to about 5% as of 2015 that can be decomposed as 3.5% through proximity and 1.5% through other gravity variables. Gains through free trade agreements (FTAs) have started dominating among these other variables starting from 1990s, following the Uruguay Round. Across countries, the total gains of OECD countries are about 1.5 times those of others, whereas the total gains of European countries are more than 10 times those of Pacific countries. Calculations based on the future potential gains from trade through policy-oriented gravity variables further suggest that there is room for an additional 0.8% or 0.4% of a welfare gain in the world through having free trade agreements or using common currencies, respectively.

Keywords: Welfare Gains from Trade, Potential Gains from Trade, Gravity Variables, Free Trade Agreements

JEL Classification: F13, F14, F63

Suggested Citation

Yilmazkuday, Hakan, Decomposing the Gains from Trade through the Standard Gravity Variables (November 12, 2020). International Economic Journal, Forthcoming, Available at SSRN: or

Hakan Yilmazkuday (Contact Author)

Florida International University (FIU) - Department of Economics ( email )

11200 SW 8th Street
Miami, FL 33199
United States


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