Gravity Model for Spain

7/31/2019 Gravity Model for Spain

1/35

BERUTTI STEFANO 761948GELSOMINO LUCA MATTIA 759936MARRA PAOLA ROBERTA 765542

MUNNAMGI HANUMAD VASANTH 764895

Gravity

model for

Spain

Politecnico di Milano International Economics 2010/2011


2/35

Agenda

Introduction

Focus on Trade

Theory

Theoretical Prediction

Data/Results of the different attempts

Sum up Final Results

Conclusion

08/06/2011 Gravity Model For Spain 2


3/35

Introduction

European Country since 1986

Official language: Spanish

Government: parliamentarydemocracy andconstitutional monarchy

Population: 46030109 (2010) Currency: Euro ()

since 1999



4/35

Introduction


1053.91

1062.59

1084.65

2009 2010 2011 (est.)

GDP nominal

32030

22997

30639

23091

32175

23506

GDP per capita ($) GDP per capita ()

GDPper capita

Billion $


5/35

Focus on Trade

0

50

100

150

200

250

300

350

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Billionof$ Imports and Exports

Import

Export



6/35

Focus on Trade


70.19%

29.81%

0% 20% 40% 60% 80%

EUROPEAN

NOTEUROPEAN

Exportsof Spain

FRANCE20%

GERMANY13%

ITALY10%

PORTUGAL9%

UNITEDKINGDOM

9%UNITEDSTATES

5%

NETHERLANDS4%

BELGIUM &

LUXBG.3%

MEXICO1%

MOROCCO1%

OTHER

25%

Spain mainpartners


7/35

Focus on Trade



8/35

Focus on Trade



9/35

Theory

The basic Gravity model tries to predictbilateral trade flows using as inputs the

economic size (usually GDP) and distancebetween two countries.

Usually to estimate this equation we use thelogarithm of both sides:



10/35

Theory

This model usually works because large

economies tend to spend more money thanthe smaller ones and also they tend to attractlarger shares of other countries spendingsince they produce more.

Other variables could be relevant: language,currency, FTA, exchange rate, etc.



11/35

Proposition

Show that Spains patterns of trade respectthe gravity model of trade.

Show that cultural, economical, and social

factors affect Spains exportation.



12/35


What affect international trade flows ofSpain?

Transportation costs Cultural factors

Comparative Advantages

FTA, currency

Economic Activities of countries

FDI,



13/35


Transportation Costs:

Shipping costs (/ km*t);

In transit stocks: f(delivery LT; value); Tariffs.

Cultural Factors:

Language; History;

Habits.



14/35


Comparative advantages:

Factor endowment;

Productivity. FTA, currency:

Exchange rate;

Tariffs. Economic Activities:

Supply and demand of goods.



15/35

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 andthese variables, even if some determinants arenot taken in consideration.



16/35

First Attempt

Variable Expected ImpactSpain GDP +

Country GDP +

Distance -



17/35

Data


Optimal Data Our Data

DistanceBetween Economic centers ofcountries

Barycenter weighted onpopulation distribution

Weighted on Transportationmodes Geodetic distance

EconomicActivities

Economic Size of the country GDP current price in $

Trade FlowsEconomic Interactions

between countries

Export

Number ofCountries

All World 130 countries

TimeframeAfter World War II (stablesituation) ?

From 1988 to 2009


18/35

Data - First Attempt



19/35

Results - First Attempt

Results

R Pearson 0,8939

R square 0,7992


Coefficients Confidence Interval

Intercept 1,1900

Spain GDP 0,3653 0,2607 0,4699

Country GDP 0,9099 0,8906 0,9291Distance -1,0989 -1,1584 -1,0389

79.92% of Spains exports are explained bythe model.

As expected:

Distance has a negative impact;

GDPs have positive impact.


20/35

Second Attempt

How can we improve the results obtained? Cultural Factors:

Colonialism (expected impact +)

Spanish Language (expected impact +)



21/35

Data Second Attempt


Categorical variables :


22/35

Results Second Attempt

Spanish Language increases the correlation

Colony is not so relevant because colonies are dated backto the beginning of 19th century and are already includedin the Spanish variable.


Results

R Pearson 0,9095

R squared 0,8271


Intercept 1.7437

Spain GDP 0,3905 0,2933 0,4876


Spanish 1,0524 0,9228 1,1819

Colony 0,2953 -0,0719 0,6625

Sharing the languageincrease exports by

about 3 times.


23/35

Third Attempt

How can we improve even further the results

obtained? European Union (Custom Union\Common

Market) (expected impact negligible)

(Economic Union) (expected impact +)



24/35

Data Third Attempt


Categorical variables :


25/35

Results Third Attempt

Europe, as we expected, doesnt affect the model Also is meaningless in this model in contrast

to what we expected.


Results

R Pearson 0,8941

R squared 0,7995


Intercept 1,3564

Spain GDP 0,3538 0,2485 0,4592


Euro 0,2595 -0,0271 0,5462

Europa -0,1479 -0,3535 0,0576


26/35

Results - Third Attempt


Why does not affect the model?

From 1999 to 2002: benefits of being part of an

economic union stable currency and lessuncertainty of e. (mean errors>0)

After 2002: depreciation of $ cheaper goods fromUS less benefits

Exports of Spain as before the introduction of(mean errors


27/35



-0.5

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

0.4

0.5

0.6

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

MeanError

ExchangeRate Model mean error

and Exchange rates

$/

$/['000] Peseta

Mean Error


28/35



0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

2.2%

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

%ofExportmktshare

Spain's ExpMarket Share

y = -0.47x + 0.77R = 0.93

y = -0.77x + 1.27R = 0.96

0.4

0.6

0.8

1

1.2

1.4

1.6

-0.6 -0.4 -0.2 -1E-15 0.2 0.4 0.6

ExchangeRate

Mean Error

Mean Error andExchange Rates

$/100Peseta

$/


29/35

Sum up


0.79

0.8

0.81

0.82

0.83

0.84

R2 Trend

-0.561

0.867

0.128

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

Distance Country GDP Spain GDP

2nd OrderPartial Correlation


30/35

Final Results

What is the very final outcome?


Correlation

R Pearson 0.911

R square 0.830


31/35

Conclusion (the real ones)

What is not included in the model?

Comparative advantages

FDI

Religion

Globalization

Political Variables

Remoteness



32/35

Thank you!

Thank you for your attention!

Questions and answers



33/35

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 - 8thEdition, and Head (2000).

Additional Data from: www.wto.com; www.inflationdata.com(oil price); www.bancaditalia.it (exchange rates);www.oecd.org.

http://www.imf.org/http://www.eurostat.eu/http://www.wikipedia.com/http://www.wto.com/http://www.inflationdata.com/http://www.bancaditalia.it/http://www.oecd.org/http://www.oecd.org/http://www.bancaditalia.it/http://www.inflationdata.com/http://www.wto.com/http://www.wikipedia.com/http://www.eurostat.eu/http://www.imf.org/


34/35

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:



35/35

Appendix 1 (cont.)

And then

That gives:

Different attempt are basically further explanationof the function g().

The gravity model of trade can be seen as adifferent and more complex interpretation of thedemand and supply curve of a country.


Date post:	05-Apr-2018
Category:	Documents
Upload:	marco-tagliabue
View:	225 times
Download:	0 times

Gravity Model for Spain

Documents