2.4. Summary
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Tinbergen extended his basic model by examining the influence of adjacency, trade agreements and the Gini coefficient of concentration, and by playing with different values for trade agreements. He concluded that each model explained about 64% of the export volume which he was satisfied with. The Commonwealth preference had a higher statistical significance than the Benelux one, but each kind of trade relations promotes the country’s export. The same applies if countries are neighbours, the higher their gross national products are, and the more diversified the exporting country’s production is. Research has shown that the following variables should not be neglected in the calculations as well: Income per capita, common language and history, such as colonial links, border effects, free trade agreements, monetary agreements, trade barriers, both on a bilateral and multilateral level, and the development of trade over time. The problem with trade barriers is their quantification. They can be direct or indirect. Different tariff rates may apply for different products so that the correct evaluation of a country’s protection index is challenging. Critics appear, referring to the constant in the equation which is not a constant but depends on the trade partners and will change over time and based on policy variables. Furthermore, the gravity model trade does not take demand, supply and prices into account. There is consent among researchers about missing theoretical basics for the gravity model. However, the gravity model remained due to its ability to predict trade volume correctly. Two studies have been discussed which confirmed its applicability. In both of them, the basic model has been examined and extended with criteria the relevant researchers thought to be important. The first study included population size, EU membership and WTO membership. In the second study, GDP per capita instead of GDP was used and EU membership, OECD membership, WTO membership, German-speaking country, rating of the economic order regarding liberty of this country were taken into consideration. In both cases, the coefficient of determination was higher for the advanced model than for the basic one. Therefore, the advanced one is to be preferred. However, literature review indicates that the predictability of this model is strongly based on the data set and may be correct for one set of countries, but incorrect for a different one.
