Trade Flows and Spatial Effects: The Gravity Model Revisited

This article revisits the popular gravity model of trade in light of the increasingly acknowledged findings of spatial econometrics and interprets the results in view of some recent theoretical developments from the economic literature that contribute to its foundation. When the inherent spatial effects are explicitly taken into account, the magnitude of the estimated parameters changes considerably and, with it, the measures on the predicted trade flows. This result is illustrated for the case of predicted trade flows between the European Union and some of its potential members.