International Trade

Research Project

A gravity model of exports by Chile

Maarten Ferdi J. Hermans

Bastián A. Layseca Bravo

Lars Joris

Borja Pacheco Lafuente

Jorge Ochoa Gibaja

Professor Eva Van Belle

Vrije Universiteit of Brussel

Master’s: International Business Management

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Abstract

This research paper applies the gravity model of international trade to Chile. It is based on
data from 2021, the latest year of which all data was available. We provide an overview of the origin
and the collection of the data used, an explanation on the theoretical framework of the gravity model,
the application to Chile and a discussion of the results. The theory states that export trade flows are
influenced by variables such as economic size of trade partners and the distance to them. The obtained
results for Chile are in line with the theory of the gravity model.

JEL Classification: F10 Trade: General, F14 Empirical Studies of Trade

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A gravity model of export by Chile.

Introduction

The following project aims to recreate gravity model, which will be applied to Chile to compare
it with the top-10 countries with the highest exports. The main objective of this project is to
demonstrate the validity of the gravity model of trade, which states that the larger a country's GDP,
the more trade it engages in with its partner countries. To estimate the gravity model, the required
information was collected, and statistical software was used to estimate its parameters. Data on
exports between countries were retrieved from the Comtrade website1, while GDP data was extracted
from the World Bank Trade2. Distance data was obtained from the Centre d'Etudes Prospectives et
d'Informations Internationales (CEPII)3. By using the data collected, this project aims to provide
insights into the applicability of Krugman's gravity model when applied to Chile's top-10 export
partners. The analysis of this data will help to understand the extent to which a country's GDP affects
its trade patterns. This study will investigate whether the gravity model of trade holds true, that is,
whether countries with higher GDPs tend to trade more with their partner countries.

Theory of the gravity model

The gravity model is an economic model that predicts how much trade there will be between
two countries. The name was given due to the analogy to Newton’s law of gravity “Just as the
gravitational attraction between any two objects is proportional to the product of their masses and
diminishes with distance4 (R. Krugman, Obstfeld , & J. Melitz , 2018). According to the gravity model,
it considers two factors: the size of each country's economy and the distance between them. The
bigger the economies and the closer the countries are, the more trade they will have between them.
Economist frequently makes use of a gravity model that is somewhat more comprehensive and
inclusive, taking the following structure:

Tij = A * Yi * Yj >Dij, (1-1)

The formula shows that the volume of trade between two countries depends on their GDP’s and
the distance between them, but not necessarily in a proportional way. This model works because

1
Source: http://comtrade.un.org
2
Source: http://data.worldbank.org
3
Source: http://www.cepii.fr/anglaisgraph/bdd/distances.htm
4
It was selected "distwces" based on the retrieved adjusted r squared. It was the highest for this distance variable. The
parameter is a measure of the impact of distance on trade, with a value of 1 indicating a strong effect. If the value of the
parameter is -1, this suggests that distance has a negative impact on trade. In other words, countries that are farther apart
tend to trade less with each other, as indicated by gravity models of bilateral trade flows (Mayer & Zignano, 2006)
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larger economies tend to spend more on imports and attract more spending due to their diverse range
of products (R. Krugman, Obstfeld , & J. Melitz , 2018)

Chile

In Chile’s case, the gravity model suggests that their trade patterns with the US, China, and Japan
can be explained by these countries having larger economies than MERCOSUR member countries.
These three countries are among the biggest economies in the world. This creates a greater
opportunity for Chilean businesses to sell their products and services there, compared to South
American countries. Despite the longer distances, technological advancements in transportation and
communication, as well as trade agreements, have made it more profitable for Chile to trade with
these countries than with countries in South America. Table 1 shows an overview of the collected data
for Chile’s top-10 export trading partners.

Table 1
Data overview of Chile’s biggest exports countries

Ranking Countries ISO Distance (Km) Exports (In millions $) GDP (In millions $)

1 China CHN 18868,62 $ 36.523,64 $ 17.734.062,65

2 USA USA 8267,96 $ 14.932,95 $ 23.315.080,56
3 Japan JPN 17345,31 $ 7.238,28 $ 4.940.877,78
4 Rep. Korea KOR 18227,12 $ 4.826,18 $ 1.810.955,87
5 Brazil BRA 3017,13 $ 4.582,09 $ 1.608.981,46
6 Peru PER 2272,70 $ 1.655,86 $ 223.248,50
7 France FRA 11550,63 $ 1.596,40 $ 2.957.879,76
8 Spain ESP 10716,51 $ 1.554,04 $ 1.427.380,68
9 Netherlands NLD 12007,36 $ 1.535,23 $ 1.012.848,76
10 Mexico MEX 6886,09 $ 1.309,89 $ 1.272.839,33
Note. Source of own elaboration.
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Looking at the scatter plot in figure 1, we can see that Chile trades considerably more with
China, the Republic of Korea, Brazil, and Peru. However, the scatter plot does not take distance into
account. For Brazil and Peru, the answer lies in the proximity of the nations and trade agreements
amongst the nations. The Economic Cooperation Agreement with Peru and an agreement with
MERCOSUR, a customs union of which Brazil is a member. These agreements facilitate trade between
the South American countries who also share cultural similarities with regards to language and
historical economic development. In comparison to the US gravity model, it has similarities with
bordering nations Canada and Mexico. For China and the Republic of Korea the explanatory factor is
the scale of their economies in comparison to other Asian countries, both China and the Republic of
Korea, as does Japan as well, belong to Asia’s five biggest economies. Geographically, the industrial
ports of Japan, China and the Republic of Korea are the easiest accessible coming from Chile to further
distribute their goods on the Asian continent. Chile also has free trade agreements with China and the
Republic of Korea and an Economic Association Agreement with Japan.

Furthermore, Chile trades considerably less with the US and some European countries such as
the Netherlands, France and Spain than expected based on these countries’ GDP. These nations fall
below the 45-degree line. For US, it falls below the line because its GDP is really high compared to the
other partners.

For Spain, there are cultural similarities with regards to language and historical ties. The
proximity of industrial ports of the France and the Netherlands provides access to Europe continent.
Besides that, the economy of the US largest in the world and the economies of France, Spain and the
Netherlands are amongst the 5 biggest economies of the European Union which, validates the theory
again as with the Asian trade partners.

Figure 1: Economic size and trade with Chile

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To calculate the multiple regression model, all the variables had to be transformed into log
variables. Then the linearized gravity model could be derived.

Table 2

Overview of the estimated coefficients and the coefficient of determination

Log. GDP 0.76

Log. Distance -0.24

R. Squared 0.62

Note. Source own elaboration. R2 adjusted = 0.6189

After calculating the multiple regression model, looking at the estimated coefficients from the
gravity model applied to Chile in Table 2, we see that if the GDP of a country increases by 1%, exports
of Chile will increase by 0.76% to the given country. If distance increases by 1%, Chile’s exports
decrease by 0.24%. The gravity model of Chile, calculated based on the data provided in Table 1, shows
an adjusted r-squared of 0.62. This means that the gravity model, based on the variables GDP and
distance, explains 61.89% of variation in Chile’s export. The estimated gravity equation for the exports
of Chile with its top-10 trading partners is:

predicted 𝑇𝑖𝑗 = constant × 𝑌𝑗0.76 × 𝐷𝑖𝑗-0.24 (1-2)

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References

Bullock, R., Brody, M., & Weinberg, F. (2016). The Little Seagull Handbook (3rd ed.).

W. W. Norton & Company.

Centre d'Etudes Prospectives et d’Informations Internationales (CEPII) (2011). Geodesic Distances.

Retrieved from: http://www.cepii.fr/anglaisgraph/bdd/distances.htm.

Gujarati, D. N. and Porter, D. C. (2003). Basic Econometrics. McGraw-Hill, Boston etc., 4th edition.

Krugman, P. R., Obstfeld, M., and Melitz, M. J. (2018). International Economics: Theory and Policy.

Pearson Education, Harlow, 11th edition.

Mankiw, G. N. (2006, October 7). How to write well. Greg Mankiw’s Blog, 7 October 2006.

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Mankiw, N. G. and Taylor, M. P. (2020). Economics. Cengage Learning, Andover, 5th edition.

Mayer, T. and Zignago. S (2006). Notes on CEPII’s distances measures. Centre d’Etudes Prospectives
et d'Informations internationales (CEPII).

McCloskey, D. N. (1999). Economical writing. An Executive Summary.

Easter Economic Journal, 25(2): 239-242

United Nations (2023). UN Comtrade Database. Retrieved on 13 February 2023 from

http://comtrade.un.org.

World Bank (2023). The World Bank: Data. Retrieved from

http://data.worldbank.org.