Gravity model: An application to trade between regional blocs

The objective of this paper is to evaluate the determinants of bilateral trade flows among 47 countries and, particularly, the effects of preferential agreements between several economic blocs and areas: European Union (EU), North-American Free Trade Area NAFTA), Caribbean Community (CARICOM), Centro-American Common Market (CACM), and other Mediterranean countries (MEDIT). The period under study is from 1980–99. The authors estimate a gravity equation that allows the comparison of the weight of the influence of preferential agreements and also, infers the relevance of other determinants of bilateral trade flows such us geographic proximity, income levels, population, and cultural similarities. The analysis is undertaken for each year of the sample in order to capture the temporal evolution of the impacts on trade of the different variables considered. Using the estimation results as a base, trade potentials resulting from new free trade agreements are calculated.