Estimation of the Gravity Equation in the Presence of Zero Flows

Tinbergen Institute Discussion Paper No. 06-072/3

31 Pages Posted: 16 Aug 2006

See all articles by Gert-Jan Linders

Gert-Jan Linders

Ministry of Social Affairs and Employmen

Henri L. F. de Groot

VU University Amsterdam - Department of Spatial Economics; Tinbergen Institute

Date Written: August 2006

Abstract

The gravity model is the workhorse model to describe and explain variation in bilateral trade patterns. Consistent with both Heckscher-Ohlin models and models of imperfect competition and trade, this versatile model has proven to be very successful, explaining a large part of the variance in trade flows. However, the log-linear model cannot straightforwardly account for the occurrence of zero-valued trade flows between pairs of countries. This paper investigates the various approaches suggested to deal with zero flows. Apart from the option to omit the zero flows from the sample, various extensions of Tobit estimation, truncated regression, probit regression and substitutions for zero flows have been suggested. We argue that the choice of method should be based on both economic and econometric considerations. The sample selection model appears to fit both considerations best. Moreover, we show that the choice of method may matter greatly for the results. In the end, the results surprisingly suggest that the simplest solution, to omit zero flows from the sample, often leads to acceptable results, although the sample selection model is preferred theoretically and econometrically.

Keywords: bilateral trade, gravity model, zero flows, sample selection model

JEL Classification: F14, F15

Suggested Citation

Linders, Gert-Jan and de Groot, Henri L.F., Estimation of the Gravity Equation in the Presence of Zero Flows (August 2006). Tinbergen Institute Discussion Paper No. 06-072/3, Available at SSRN: https://ssrn.com/abstract=924160 or http://dx.doi.org/10.2139/ssrn.924160

Gert-Jan Linders (Contact Author)

Ministry of Social Affairs and Employmen ( email )

Den Haag
Netherlands

Henri L.F. De Groot

VU University Amsterdam - Department of Spatial Economics ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands
+31 20 598 6168 (Phone)
+31 20 598 6004 (Fax)

Tinbergen Institute

Gustav Mahlerplein 17
Amsterdam, 1082 MS
Netherlands

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
592
Abstract Views
2,469
rank
50,514
PlumX Metrics