Regional economic integration and the applicability of the gravity model

Scope and method of study. The main purpose of this study was to determine through the gravity model the effectiveness of a spatial factor in explaining ongoing regional economic integration schemes specifically expressed as the formation of trading blocs in the global economy. The study analyzed international trade flow data from 46 nations representing 7 separate geographical regions all around the world. The international regions were chosen based more on geographical delineation rather than existing schemes of economic integration to investigate the underlying spatial forces which govern the pattern and size of trade flows. Unlike other various attempts, the sum of exports and imports (trade volume) was analyzed in the framework of the gravity model instead of being analyzed separately. Land area was hypothesized to be a proxy for resource endowments instead of population largely employed in similar analyses.; Findings and conclusions. Both cross-section and time-series analyses of the data on international flows of commodities led to suggestive conclusions regarding the role of the spatial factor in the process of economic interactions over national borders. Proximity expressed as distance comprising a spatial factor as one of the basic variables in the gravity model is proved to play a further important role in the process of forming trading blocs along with the dummy for the same region than it has been recognized by now. Land area is also tested to play a part in governing trade flows negatively. Both GNPs of a pair of trading countries are empirically tested to be major variables in determining the size of trade volume. The negative effect of GNPs captured by the slope dummy variable for the 'same region' suggests a higher possibility that worldwide free trade will prevail in the long run as implied by 'second best' of regionalism, and suggested by Kemp and Wan's proposition concerning integration.