Investigating the impact of GDP and distance variables in the gravity model using sign and rank tests

Abstract

The gravity model of trade has been a workhorse of international economics over the last fifty years. The main variables incorporated in the standard gravity model of trade are gross domestic product of trading countries and distance between them. The previous investigation has been limited only to an econometric estimation and evaluation of regression coefficients in the gravity model and their significance. However, until now there has been no research on investigating the impact of GDP and Distance variables in the gravity model by using sign and rank tests, which is the objective of this paper. This paper adds to the existing literature by employing non-parametric approach to estimating the impact of variables in the gravity model by using sign and rank tests in the case of World countries. The results of the analysis have shown that the GDP variable exhibits a higher distribution of positive signs achieved in the sign test and presents less average errors in the rank test in predicting bilateral trade imports with regards to the Distance variable. Furthermore, the GDP variable also has a relatively higher impact in the gravity model than the Distance variable.

Keywords

• gravity model
• world countries
• sign and rank tests
• rmse
• mape