Gravity Model Estimation: OLS Method with Reference to India

Abstract

This research study conducted aims to investigate the estimation of gravity model of international trade as applied to the country of India and its partner trading countries. The gravity model is an economic theory that suggests that economic factors, such as the size of two countries, distance between them, and bilateral agreements will affect international trade between them. The study used a combination of secondary data from government records and an econometric model to assess the validity of the gravity model of international trade. The results showed that the gravity model is a valid predictor of international trade flows between India and its partner trading countries. Specifically, factors such as country size, distance between countries, and bilateral agreements were found to be significant predictors of the amount of bilateral trade between India and its trading partners. This study provides evidence of the validity of the gravity model of international trade as applied to India and its partner trading countries. Additionally, the results shed light on the importance of the efforts of policy makers in seeking to increase international trade with partner countries. By carefully structuring these efforts based on the gravity model's predictive capabilities, policy makers can build mutually beneficial trading relationships with other countries. The findings of a statistical analysis of a log-linear approach in estimating a gravity model with five variables, log-trade, log-GDP, contiguity, common language, and PTA coefficients, using STATA 15 software. The results show that the estimated gravity equation is consistent with the classical gravity model