Structural Gravity and Trade Agreements: Does the Measurement of Domestic Trade Matter?

Abstract

Economic theory suggests including domestic trade flows when estimating structural gravity models. The inclusion of domestic trade flows helps to identify parameters that cannot be estimated with international trade flows alone. The complication is that domestic trade flows can be measured empirically in different ways. Does it matter which one is used? We compare the three most common approaches to measuring domestic trade and show that they lead to very similar estimates of the parameters that are usually estimated within a structural gravity framework.

Keywords: international trade, structural gravity model, domestic trade, trade agreements

JEL Classification: F13, F14, F15, F62