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Application of gravity models with a fixed component in the international trade flows of coal, iron ore and crude oil

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Abstract

As freight transport flows grow continuously, developing better quantitative models for forecasting future trade flows becomes more important. Trade flows can be estimated by discrete choice theory, leading to gravity models formulations. At a given point in time, trade flows may also be affected by long-term contracts or simply trading habits. This leads to situations where only a fraction of the market is subject to choice. In this article, we extend the traditional gravity model such that a fixed amount is separated from observed trade flows and only residuals are subject to discrete choice. We apply our model on coal, iron ore and oil seaborne trade flows and demonstrate that the proposed construction results in a significantly better fit for the observed data. This observation is important in predicting future trade volumes.

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Notes

  1. We have kept the scale as it is reported in Fearnleys Review (in thousand tonnes) although in Andersson et al (2009), the data was converted to million tonnes.

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Acknowledgements

The authors wish to thank the two anonymous reviewers, whose comments helped them to improve the article.

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Correspondence to Sahar Babri.

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Babri, S., Jørnsten, K. & Viertel, M. Application of gravity models with a fixed component in the international trade flows of coal, iron ore and crude oil. Marit Econ Logist 19, 334–351 (2017). https://doi.org/10.1057/mel.2015.27

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