Embed Size (px)
Citation preview
Introduction and Workshop OverviewThe Basic Gravity Model
Summary
Session 1: Introduction to Gravity Modeling
Ben Shepherd
Niehaus Center, Princeton UniversityGEM, Sciences Po
ARTNeT Capacity Building Workshop for Trade Research:“Behind the Border” Gravity Modeling
Monday, December 15, 2008
Ben Shepherd Session 1: Introduction to Gravity Modeling
Introduction and Workshop OverviewThe Basic Gravity Model
Summary
Outline
1 Introduction and Workshop OverviewIntroductionOverview of the Workshop
2 The Basic Gravity ModelThe Gravity AnalogyStylized Facts: Trade, GDP, and Distance
3 Summary
Ben Shepherd Session 1: Introduction to Gravity Modeling
Introduction and Workshop OverviewThe Basic Gravity Model
Summary
IntroductionOverview of the Workshop
Outline
1 Introduction and Workshop OverviewIntroductionOverview of the Workshop
2 The Basic Gravity ModelThe Gravity AnalogyStylized Facts: Trade, GDP, and Distance
3 Summary
Ben Shepherd Session 1: Introduction to Gravity Modeling
Introduction and Workshop OverviewThe Basic Gravity Model
Summary
IntroductionOverview of the Workshop
Introduction
“Gravity” is the workhorse of empirical international trade.
Origins with Tinbergen (1962).
Thousands of published articles and working papers sincethen.“Some of the clearest and most robust findings in empiricaleconomics.” (Leamer & Levinsohn, 1995)
Ben Shepherd Session 1: Introduction to Gravity Modeling
Introduction and Workshop OverviewThe Basic Gravity Model
Summary
IntroductionOverview of the Workshop
Introduction
Numerous applications looking at different types of tradecosts, and their impacts on trade flows:
Transport costs.Tariffs and non-tariff barriers.Regional integration agreements, currency unions, and theGATT/WTO.Time delays at export/import and trade facilitation.Governance, corruption, and contract enforcement.
Ben Shepherd Session 1: Introduction to Gravity Modeling
Introduction and Workshop OverviewThe Basic Gravity Model
Summary
IntroductionOverview of the Workshop
Introduction
In recent years, though, gravity has become a complexbusiness:
Intuition is not enough: back to microfoundations!Different microfoundations imply different estimationtechniques.Use of sectorally disaggregated data, and broad countrysamples, brings out new issues for theory and empirics.
To do good applied/policy research, it is important to be ontop of the latest developments in the literature.
Ben Shepherd Session 1: Introduction to Gravity Modeling
Introduction and Workshop OverviewThe Basic Gravity Model
Summary
IntroductionOverview of the Workshop
Outline
1 Introduction and Workshop OverviewIntroductionOverview of the Workshop
2 The Basic Gravity ModelThe Gravity AnalogyStylized Facts: Trade, GDP, and Distance
3 Summary
Ben Shepherd Session 1: Introduction to Gravity Modeling
Introduction and Workshop OverviewThe Basic Gravity Model
Summary
IntroductionOverview of the Workshop
Overview of the WorkshopGeneral Objectives
Help boost knowledge and capacity for policy-relevanttrade research in the Asia-Pacific.
Promote network effects through the exchange of ideas,questions, sources, etc.
Particular focus on trade costs, trade facilitation, andbehind the border (BTB) barriers.
Provide a thorough overview of the gravity model, boththeory and estimation techniques, to act as a springboardto individual and joint research projects.
Present and compare data sources, empirical strategies,estimation methods, and results.
Ben Shepherd Session 1: Introduction to Gravity Modeling
Introduction and Workshop OverviewThe Basic Gravity Model
Summary
IntroductionOverview of the Workshop
Overview of the WorkshopMethodology and Approach
1 Intuitive presentation of basic ideas.Introduction to simple data manipulation.Estimation of traditional gravity models using real data.
2 More formal presentation of recent gravity theory.Estimation of the “theoretical” gravity model using paneldata techniques.
3 Econometric difficulties facing gravity modelers.Estimation in the presence of zero trade flows.Estimation in the presence of endogenous policies.
4 Bring it all together: current best practice.
Ben Shepherd Session 1: Introduction to Gravity Modeling
Introduction and Workshop OverviewThe Basic Gravity Model
Summary
IntroductionOverview of the Workshop
Overview of the WorkshopMethodology and Approach
1 Intuitive presentation of basic ideas.Introduction to simple data manipulation.Estimation of traditional gravity models using real data.
2 More formal presentation of recent gravity theory.Estimation of the “theoretical” gravity model using paneldata techniques.
3 Econometric difficulties facing gravity modelers.Estimation in the presence of zero trade flows.Estimation in the presence of endogenous policies.
4 Bring it all together: current best practice.
Ben Shepherd Session 1: Introduction to Gravity Modeling
Introduction and Workshop OverviewThe Basic Gravity Model
Summary
IntroductionOverview of the Workshop
Overview of the WorkshopMethodology and Approach
1 Intuitive presentation of basic ideas.Introduction to simple data manipulation.Estimation of traditional gravity models using real data.
2 More formal presentation of recent gravity theory.Estimation of the “theoretical” gravity model using paneldata techniques.
3 Econometric difficulties facing gravity modelers.Estimation in the presence of zero trade flows.Estimation in the presence of endogenous policies.
4 Bring it all together: current best practice.
Ben Shepherd Session 1: Introduction to Gravity Modeling
Introduction and Workshop OverviewThe Basic Gravity Model
Summary
IntroductionOverview of the Workshop
Overview of the WorkshopMethodology and Approach
1 Intuitive presentation of basic ideas.Introduction to simple data manipulation.Estimation of traditional gravity models using real data.
2 More formal presentation of recent gravity theory.Estimation of the “theoretical” gravity model using paneldata techniques.
3 Econometric difficulties facing gravity modelers.Estimation in the presence of zero trade flows.Estimation in the presence of endogenous policies.
4 Bring it all together: current best practice.
Ben Shepherd Session 1: Introduction to Gravity Modeling
Introduction and Workshop OverviewThe Basic Gravity Model
Summary
IntroductionOverview of the Workshop
Overview of the WorkshopOutline of Sessions
Morning Sessions
Generally focus on presentations by the trainer.
Set out relevant theory and empirical methods.
Present examples.
Afternoon Sessions
Focus on individual and small group applications byparticipants using real data.
Short presentations by the trainer focusing on using Stata.
Ben Shepherd Session 1: Introduction to Gravity Modeling
Introduction and Workshop OverviewThe Basic Gravity Model
Summary
IntroductionOverview of the Workshop
Overview of the WorkshopOutline of Sessions
Morning Sessions
Generally focus on presentations by the trainer.
Set out relevant theory and empirical methods.
Present examples.
Afternoon Sessions
Focus on individual and small group applications byparticipants using real data.
Short presentations by the trainer focusing on using Stata.
Ben Shepherd Session 1: Introduction to Gravity Modeling
Introduction and Workshop OverviewThe Basic Gravity Model
Summary
IntroductionOverview of the Workshop
Overview of the WorkshopMonday, December 15
Morning Sessions
Introduction to the course.
Presentation of the basic gravity model.
Estimation of the basic gravity model by OLS, testinghypotheses, and interpreting results.
Afternoon Sessions
Introduction to Stata, and tricks of the trade.
Setting up a gravity dataset in Stata, and performingsimple manipulations.
Using Stata to estimate a basic gravity model.
Ben Shepherd Session 1: Introduction to Gravity Modeling
Introduction and Workshop OverviewThe Basic Gravity Model
Summary
IntroductionOverview of the Workshop
Overview of the WorkshopMonday, December 15
Morning Sessions
Introduction to the course.
Presentation of the basic gravity model.
Estimation of the basic gravity model by OLS, testinghypotheses, and interpreting results.
Afternoon Sessions
Introduction to Stata, and tricks of the trade.
Setting up a gravity dataset in Stata, and performingsimple manipulations.
Using Stata to estimate a basic gravity model.
Ben Shepherd Session 1: Introduction to Gravity Modeling
Introduction and Workshop OverviewThe Basic Gravity Model
Summary
IntroductionOverview of the Workshop
Overview of the WorkshopTuesday, December 16
Morning Sessions
Presentation of the Anderson and Van Wincoop“theoretical” gravity model.
Estimation of the AvW gravity model.
Afternoon Sessions
Using Stata to estimate models with a large number ofdummy variables..
Calculating approximate multilateral resistance terms, andestimating the BB version of the AvW model.
Ben Shepherd Session 1: Introduction to Gravity Modeling
Introduction and Workshop OverviewThe Basic Gravity Model
Summary
IntroductionOverview of the Workshop
Overview of the WorkshopTuesday, December 16
Morning Sessions
Presentation of the Anderson and Van Wincoop“theoretical” gravity model.
Estimation of the AvW gravity model.
Afternoon Sessions
Using Stata to estimate models with a large number ofdummy variables..
Calculating approximate multilateral resistance terms, andestimating the BB version of the AvW model.
Ben Shepherd Session 1: Introduction to Gravity Modeling
Introduction and Workshop OverviewThe Basic Gravity Model
Summary
IntroductionOverview of the Workshop
Overview of the WorkshopWednesday, December 17
Morning Sessions
The gravity model with multiple countries, sectors, andtime periods.
Estimating panel data models using fixed and randomeffects.
Afternoon Sessions
Using Stata to work with large gravity datasets.
Estimating fixed and random effects models in Stata.
Presentations by Mr. De and Ms. Weerahewa.
Ben Shepherd Session 1: Introduction to Gravity Modeling
Introduction and Workshop OverviewThe Basic Gravity Model
Summary
IntroductionOverview of the Workshop
Overview of the WorkshopWednesday, December 17
Morning Sessions
The gravity model with multiple countries, sectors, andtime periods.
Estimating panel data models using fixed and randomeffects.
Afternoon Sessions
Using Stata to work with large gravity datasets.
Estimating fixed and random effects models in Stata.
Presentations by Mr. De and Ms. Weerahewa.
Ben Shepherd Session 1: Introduction to Gravity Modeling
Introduction and Workshop OverviewThe Basic Gravity Model
Summary
IntroductionOverview of the Workshop
Overview of the WorkshopThursday, December 18
Morning Sessions
Dealing with endogeneity of policies via instrumentalvariables.
Estimating and testing IV models in Stata.
Afternoon Sessions
Estimating gravity models when zero trade flows areimportant.
Using Stata to estimate PPML and Heckman sampleselection models.
Ben Shepherd Session 1: Introduction to Gravity Modeling
Introduction and Workshop OverviewThe Basic Gravity Model
Summary
IntroductionOverview of the Workshop
Overview of the WorkshopThursday, December 18
Morning Sessions
Dealing with endogeneity of policies via instrumentalvariables.
Estimating and testing IV models in Stata.
Afternoon Sessions
Estimating gravity models when zero trade flows areimportant.
Using Stata to estimate PPML and Heckman sampleselection models.
Ben Shepherd Session 1: Introduction to Gravity Modeling
Introduction and Workshop OverviewThe Basic Gravity Model
Summary
IntroductionOverview of the Workshop
Overview of the WorkshopFriday, December 19
Morning Sessions
Using gravity models for counterfactual simulations.
Running counterfactual simulations in Stata.
Afternoon SessionsWorkshop consolidation: best practice gravity modeling.
Additional techniques, alternative approaches, new ideas,and open questions.
Brainstorming session.
Ben Shepherd Session 1: Introduction to Gravity Modeling
Introduction and Workshop OverviewThe Basic Gravity Model
Summary
IntroductionOverview of the Workshop
Overview of the WorkshopFriday, December 19
Morning Sessions
Using gravity models for counterfactual simulations.
Running counterfactual simulations in Stata.
Afternoon SessionsWorkshop consolidation: best practice gravity modeling.
Additional techniques, alternative approaches, new ideas,and open questions.
Brainstorming session.
Ben Shepherd Session 1: Introduction to Gravity Modeling
Introduction and Workshop OverviewThe Basic Gravity Model
Summary
IntroductionOverview of the Workshop
Overview of the WorkshopCourse Materials
All materials are available fromwww.princeton.edu/~bshepher.
Some of the suggested readings are technical. Focus onthe logic and implications, which are intuitive, rather thanthe math.
Handouts on the AvW model and recent extensions.Again, focus on the intuition, not the math.
Datasets are mostly drawn from published research. Makesure you can reproduce their results, then experiment withdifferent specifications.
Ben Shepherd Session 1: Introduction to Gravity Modeling
Introduction and Workshop OverviewThe Basic Gravity Model
Summary
The Gravity AnalogyStylized Facts: Trade, GDP, and Distance
Outline
1 Introduction and Workshop OverviewIntroductionOverview of the Workshop
2 The Basic Gravity ModelThe Gravity AnalogyStylized Facts: Trade, GDP, and Distance
3 Summary
Ben Shepherd Session 1: Introduction to Gravity Modeling
Introduction and Workshop OverviewThe Basic Gravity Model
Summary
The Gravity AnalogyStylized Facts: Trade, GDP, and Distance
The Gravity Analogy
Newton’s theory of gravity postulates that the gravitationalforce between two objects is directly proportional to eachof their masses, and inversely proportional to the square ofthe distance between them.
Fij = GMiMj
D2ij
G here is a gravitational constant, supposed universal.
This is fine for planets, apples, etc. But what is theconnection with trade?
Ben Shepherd Session 1: Introduction to Gravity Modeling
Introduction and Workshop OverviewThe Basic Gravity Model
Summary
The Gravity AnalogyStylized Facts: Trade, GDP, and Distance
The Gravity Analogy
Physics
Fij = G Mi Mj
D2ij
Economics
Xij = c Yi Yjdij
Economic “mass” is proxied by a country’s GDP.
The distance between countries is taken as an indication ofthe level of trade costs they face.
Think of a larger economy pulling more goods from itstrading partners; similarly, a larger economy pushes moregoods towards its trading partners.
But this process is impeded by trade costs (e.g., transport,tariffs, etc.)
Ben Shepherd Session 1: Introduction to Gravity Modeling
Introduction and Workshop OverviewThe Basic Gravity Model
Summary
The Gravity AnalogyStylized Facts: Trade, GDP, and Distance
The Gravity Analogy
Physics
Fij = G Mi Mj
D2ij
Economics
Xij = c Yi Yjdij
Take logs, add some reduced form coefficients, and includean error term to get the familiar empirical gravity model:
log(
Xij)
= b0 +b1 log(Yi)+b2 log(
Yj)
+b3 log(
dij)
+eij
b1, b2 > 0; b3 < 0
It is intuitively appealing, and also happens to have verystrong explanatory power.To get a feel for just what a good job it can do, let’s have alook at some stylized facts.
Ben Shepherd Session 1: Introduction to Gravity Modeling
Introduction and Workshop OverviewThe Basic Gravity Model
Summary
The Gravity AnalogyStylized Facts: Trade, GDP, and Distance
Outline
1 Introduction and Workshop OverviewIntroductionOverview of the Workshop
2 The Basic Gravity ModelThe Gravity AnalogyStylized Facts: Trade, GDP, and Distance
3 Summary
Ben Shepherd Session 1: Introduction to Gravity Modeling
Introduction and Workshop OverviewThe Basic Gravity Model
Summary
The Gravity AnalogyStylized Facts: Trade, GDP, and Distance
Stylized Facts: Trade, GDP, and Distance
Using some basic data, we can quickly get a sense of justwhat the gravity model is picking up.
Bilateral trade: 2005, nominal USD.
Source: Comtrade via WITS.
Export and importer GDP: 2005, nominal USD
Source: World Development Indicators.
Bilateral distance.
Source: CEPII distance dataset.
Ben Shepherd Session 1: Introduction to Gravity Modeling
Introduction and Workshop OverviewThe Basic Gravity Model
Summary
The Gravity AnalogyStylized Facts: Trade, GDP, and Distance
Stylized Facts: Trade, GDP, and DistanceSummary Statistics
Variable Obs Mean Std. Dev. Min Maxtrade_value 23411 1880230 7.11E+07 0 1.03E+10gdp05_exp 20355 3.34E+11 1.22E+12 6.64E+07 1.24E+13gdp05_imp 21666 4.21E+11 1.38E+12 6.64E+07 1.24E+13dist 22174 7564.114 4540.373 9.342786 19951.16
Ben Shepherd Session 1: Introduction to Gravity Modeling
Introduction and Workshop OverviewThe Basic Gravity Model
Summary
The Gravity AnalogyStylized Facts: Trade, GDP, and Distance
Stylized Facts: Trade, GDP, and DistanceBivariate Correlations
ln_imports ln_gdp_exp ln_gdp_imp ln_gdp_bothln_imports 1ln_gdp_exp 0.56 1ln_gdp_imp 0.41 -0.17 1ln_gdp_both 0.75 0.65 0.64 1ln_dist -0.26 0 0.04 0.03
Ben Shepherd Session 1: Introduction to Gravity Modeling
Introduction and Workshop OverviewThe Basic Gravity Model
Summary
The Gravity AnalogyStylized Facts: Trade, GDP, and Distance
Stylized Facts: Trade, GDP, and DistanceLn(Imports) vs. Ln(GDPi*GDPj)
−10
010
2030
35 40 45 50 55 60ln_gdp_both
Fitted values ln_imports
Ben Shepherd Session 1: Introduction to Gravity Modeling
Introduction and Workshop OverviewThe Basic Gravity Model
Summary
The Gravity AnalogyStylized Facts: Trade, GDP, and Distance
Stylized Facts: Trade, GDP, and DistanceLn(Imports) vs. Ln(Distance)
−10
010
2030
2 4 6 8 10ln_dist
Fitted values ln_imports
Ben Shepherd Session 1: Introduction to Gravity Modeling
Introduction and Workshop OverviewThe Basic Gravity Model
Summary
The Gravity AnalogyStylized Facts: Trade, GDP, and Distance
Stylized Facts: Trade, GDP, and DistanceConsolidation
Some evidence of a positive relationship between the GDPof trading partners, and bilateral trade.
Some evidence of a negative relationship betweeninternational distance, and bilateral trade.
But these correlations:
Do not control for other potential influences;Do not equate to causation;Are subject to considerable deviations, in particular at lowGDP and high distance.
Ben Shepherd Session 1: Introduction to Gravity Modeling
Introduction and Workshop OverviewThe Basic Gravity Model
Summary
Summary
The gravity model accords well with basic intuition aboutthe drivers of international trade.
Its structure fits with some important stylized facts.
In the next session, we will look at how to bring it moreseriously into contact with the data.
Ben Shepherd Session 1: Introduction to Gravity Modeling
