The Gravity Model of International Trade Using Classic and New Centrality Indices

The gravity model of international trade is one of the most successful and robust heuristicы in econometrics. The classic form of the gravity model relates the volume of the bilateral trade with Gross Domestic Product, distance and any possible trade barriers between any two countries. The multilateral model also introduces the elements of network topology. Most of the studies in this domain explore the empirical side of gravity models without solid theoretical ground. This paper aims to introduce the multilateral trade model based on the network analysis. The network analysis exploits some of the centrality measures that represent different properties of any country as a part of the international trade network. The classic centralities describe the direct influence of the counties, while the new centralities describe the group influence of countries as their potential power in trade agreements or unions. The gravity model uses these measures as features for regression to estimate the impact of the trade network structure on the trade volumes. Designed this way, the model solves the endogeneity and complexity problem of a simple multilateral model and has a profound theoretical justification.