Gravity Model For Spain

Politecnico di Milano International Economics 2010/2011
Gravity model for Spain

BERUTTI STEFANO 761948 GELSOMINO LUCA MATTIA 759936 MARRA PAOLA ROBERTA 765542 MUNNAMGI HANUMAD VASANTH 764895
Agenda
Introduction Focus on Trade Theory Theoretical Prediction Data/Results of the different attempts Sum up Final Results Conclusion
Gravity Model For Spain 2
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Introduction
European Country since 1986 Official language: Spanish Government: parliamentary democracy and constitutional monarchy Population: 46030109 (2010) Currency: Euro () since 1999
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Introduction
1084.65
32030
32175
GDP nominal
Billion $
1062.59 1053.91
30639
GDP per capita

22997
23091
23506
2009
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2010
2011 (est.)
GDP per capita ($)
GDP per capita ()

4
Gravity Model For Spain
Focus on Trade
300 250 200 150
Billion of $
350
Imports and Exports

Import Export
100
50 0
2000
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2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
5
Focus on Trade
Spain main partners
OTHER 25% FRANCE 20%
NOT EUROPEAN
29.81%
Exports of Spain
MOROCCO 1% MEXICO 1%
GERMANY 13%
EUROPEAN
70.19%
0% 20% 40% 60%
BELGIUM & LUXBG. 3%

NETHERLANDS 4%
80%
UNITED STATES 5%
UNITED KINGDOM 9%
ITALY 10%
PORTUGAL 9%
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Focus on Trade
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Focus on Trade
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Theory
The basic Gravity model tries to predict bilateral trade flows using as inputs the economic size (usually GDP) and distance between two countries.
Usually to estimate this equation we use the logarithm of both sides:
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Theory
This model usually works because large economies tend to spend more money than the smaller ones and also they tend to attract larger shares of other countries spending since they produce more. Other variables could be relevant: language, currency, FTA, exchange rate, etc.
Proposition
Show that Spains patterns of trade respect the gravity model of trade. Show that cultural, economical, and social factors affect Spains exportation.
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Theoretical Prediction
What affect international trade flows of Spain? Transportation costs Cultural factors Comparative Advantages FTA, currency Economic Activities of countries FDI,
Transportation Costs: Shipping costs ( / km*t); In transit stocks: f(delivery LT; value); Tariffs. Cultural Factors: Language; History; Habits.
Comparative advantages: Factor endowment; Productivity. FTA, currency: Exchange rate; Tariffs. Economic Activities: Supply and demand of goods.
First Attempt
We approximated: Transportation Costs and cultural factor with distance; Economic Activities with GDP; Everything else is considered negligible. Therefore we expect a quite good R2 coefficient (and so a good correlation) between flows and these variables, even if some determinants are not taken in consideration.
First Attempt
Variable Spain GDP Country GDP Distance
Expected Impact + + -
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Data
Optimal Data
Distance Between Economic centers of countries Weighted on Transportation modes Economic Activities Trade Flows Number of Countries Timeframe
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Our Data
Barycenter weighted on population distribution Geodetic distance GDP current price in $ Export 130 countries From 1988 to 2009
17
Economic Size of the country Economic Interactions between countries All World After World War II (stable situation) ?
Data - First Attempt
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Results - First Attempt

Results R Pearson 0,8939 R square 0,7992 Coefficients Intercept 1,1900 Spain GDP 0,3653 Country GDP 0,9099 Distance -1,0989 Confidence Interval 0,2607 0,8906 -1,1584 0,4699 0,9291 -1,0389
79.92% of Spains exports are explained by the model. As expected: Distance has a negative impact; GDPs have positive impact.
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Second Attempt
How can we improve the results obtained? Cultural Factors:
Colonialism (expected impact +) Spanish Language (expected impact +)
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Data Second Attempt
Categorical variables :
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Results Second Attempt

Results
R Pearson R squared
0,9095 0,8271
Sharing the language increase exports by about 3 times.
Coefficients Confidence Interval Intercept 1.7437 Spain GDP 0,3905 0,2933 0,4876 Country GDP 0,8838 0,8657 0,9018 Distance -1,1996 -1,2558 -1,1434 Spanish 1,0524 0,9228 1,1819 Colony 0,2953 -0,0719 0,6625
Spanish Language increases the correlation Colony is not so relevant because colonies are dated back to the beginning of 19th century and are already included in the Spanish variable.
Third Attempt
How can we improve even further the results obtained? European Union (Custom Union\Common Market) (expected impact negligible) (Economic Union) (expected impact +)
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Data Third Attempt
Categorical variables :
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Results Third Attempt

Coefficients Results 1,3564 R Pearson 0,8941 Intercept 0,3538 R squared 0,7995 Spain GDP Country GDP 0,9125 Distance -1,1096 Euro 0,2595 Europa -0,1479 Confidence Interval
0,2485 0,8913 -1,1813 -0,0271 -0,3535 0,4592 0,9336 -1,0379 0,5462 0,0576
Europe, as we expected, doesnt affect the model Also is meaningless in this model in contrast to what we expected.
Results - Third Attempt

Why does not affect the model? From 1999 to 2002: benefits of being part of an economic union stable currency and less uncertainty of e. (mean errors>0) After 2002: depreciation of $ cheaper goods from US less benefits Exports of Spain as before the introduction of (mean errors<0)

Exchange Rate 1.6 1.4
1.2
Mean Error $/ $/['000] Peseta Mean Error
Model mean error and Exchange rates
0.6 0.5 0.4 0.3
0.2
0.1
0.8 0 0.6 -0.1 -0.2 -0.3 -0.4 -0.5 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
0.4
0.2
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1.6 % of Export mkt share 2.2% 2.0%
Spain's Exp Market Share
1.4
1.8%
1.2
Exchange Rate
Mean Error and Exchange Rates

y = -0.77x + 1.27 R = 0.96
1.6% 1 1.4% 0.8 y = -0.47x + 0.77 R = 0.93
1.2%
1.0%
0.6
$/100Peseta $/
0.8%
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 0.4
Mean Error -0.6 -0.4 -0.2 -1E-15 0.2 0.4 0.6
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Sum up
0.84 1 0.867 0.83
R2
Trend
0.8 0.6 0.4
0.82
0.2 0
0.128
0.81
Distance -0.2 -0.4
Country GDP
Spain GDP
0.8
-0.6
-0.8
-0.561
2nd Order Partial Correlation
0.79
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Final Results
What is the very final outcome?
Correlation R Pearson 0.911 R square 0.830
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Conclusion (the real ones)

What is not included in the model? Comparative advantages FDI Religion Globalization Political Variables Remoteness
Thank you!
Thank you for your attention! Questions and answers
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Bibliography
GDP from www.imf.org Trade Data from www.eurostat.eu Introduction data from www.wikipedia.org Theory from class notes, Krugman Obstfeld International Economics - Theory & Policy - 8th Edition, and Head (2000).
Additional Data from: www.wto.com; www.inflationdata.com (oil price); www.bancaditalia.it (exchange rates); www.oecd.org.
Appendix 1
A country can export at least its entire GDP:
Where: S is a function of different factors:

For example, our first attempt was to consider:
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Appendix 1 (cont.)
And then That gives:
Different attempt are basically further explanation of the function g(). The gravity model of trade can be seen as a different and more complex interpretation of the demand and supply curve of a country.

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Politecnico di Milano International Economics 2010/2011