The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Gravity Equation

  • Robert C. Feenstra
Reference work entry


The gravity equation explains the amount of trade between countries based on their economic sizes and the distance between them. While it has been in use since the 1960s, its theoretical foundation has been known for a much shorter period, and recent years have seen an large amount of research on its derivation and estimation. We review the theoretical and empirical literature on the gravity equation. In addition to explaining the amount of trade, this equation has been applied to foreign direct investment, the volatility of prices, and the impact of currency unions and free trade areas.


Border effects Constant-elasticity-of-substitution (CES) preferences Currency unions Distance Elasticity of substitution Estimation Euro Fixed effects Foreign direct investment Gravity equation International trade Monopolistic competition Poisson distribution Product differentiation Selection equation Specialization Transport costs World Trade Organization 

JEL Classifications

This is a preview of subscription content, log in to check access.



The author would like to thank Keith Head for his very helpful comments.


  1. Anderson, J.A. 1979. A theoretical foundation for the gravity equation. American Economic Review 69: 106–116.Google Scholar
  2. Anderson, J.A., and E. van Wincoop. 2003. Gravity with gravitas: A solution to the border puzzle. American Economic Review 93: 170–192.CrossRefGoogle Scholar
  3. Baier, S., and J.H. Bergstrand. 2001. The growth of world trade: Tariffs, transport costs, and income similarity. Journal of International Economics 53: 1–27.CrossRefGoogle Scholar
  4. Baldwin, R. 2006a. The euro’s trade effects. Working Paper No. 594, European Central Bank.Google Scholar
  5. Baldwin, R. 2006b. In or out: Does it make a difference? an evidence based analysis of the trade effects of the euro. London: CEPR.Google Scholar
  6. Bergstrand, J.H. 1985. The generalized gravity equation, monopolistic competition, and the factor-proportions theory in international trade. The Review of Economics and Statistics 71: 143–153.CrossRefGoogle Scholar
  7. Bergstrand, J.H. 1989. The gravity equation in international trade: Some microeconomic foundations and empirical evidence. The Review of Economics and Statistics 67: 474–481.CrossRefGoogle Scholar
  8. Bhagwati, J.N. 1972. The Heckscher–Ohlin theorem in the multi-commodity case. Journal of Political Economy 80: 1052–1055.CrossRefGoogle Scholar
  9. Davis, D.R. 1995. Intra-industry trade: A Heckscher–Ohlin–Ricardo approach. Journal of International Economics 39: 201–226.CrossRefGoogle Scholar
  10. Eaton, J., and S. Kortum. 2002. Technology, geography and trade. Econometrica 70: 1741–1780.CrossRefGoogle Scholar
  11. Eaton, J., and A. Tamura. 1994. Bilateral and regionalism in Japanese and U.S. trade and direct foreign investment patterns. Journal of the Japanese and International Economies 8: 478–510.CrossRefGoogle Scholar
  12. Engel, C., and J.H. Rogers. 1996. How wide is the border? American Economic Review 86: 1112–1125.Google Scholar
  13. Evenett, S., and W. Keller. 2002. On theories explaining the success of the gravity equation. Journal of Political Economy 110: 281–315.CrossRefGoogle Scholar
  14. Feenstra, R. 2004. Advanced International Trade. Princeton: Princeton University Press.Google Scholar
  15. Feenstra, R.C., J.R. Markusen, and A.K. Rose. 2001. Using the gravity equation to differentiate among alternative theories of trade. Canadian Journal of Economics 34: 430–447.CrossRefGoogle Scholar
  16. Head, K., and J. Ries. 2005. Judging Japan’s FDI: The verdict from a dartboard model. Journal of the Japanese and International Economies 19: 215–232.CrossRefGoogle Scholar
  17. Helpman, E. 1987. Imperfect competition and international trade: Evidence from fourteen industrial countries. Journal of the Japanese and International Economies 1: 62–81.CrossRefGoogle Scholar
  18. Helpman, E., M.Melitz, and Y.Rubinstein. 2007. Trading partners and trading volumes. Working Paper No. 12927. Cambridge, MA: NBER.Google Scholar
  19. McCallum, J. 1995. National borders matter. American Economic Review 85: 615–623.Google Scholar
  20. Rose, A.K. 2000. One money, one market: Estimating the effect of common currencies on trade. Economic Policy 30: 9–45.Google Scholar
  21. Rose, A.K. 2004. Do we really know that the WTO increases trade? American Economic Review 94: 98–114.CrossRefGoogle Scholar
  22. Rose, A.K., and E. van Wincoop. 2001. National money as a barrier to international trade: The real case for currency union. American Economic Review 91: 386–390.CrossRefGoogle Scholar
  23. Silva, J.S., and S. Tenreyro. 2006. The log of gravity. The Review of Economics and Statistics 88(4): 641–658.CrossRefGoogle Scholar
  24. Subramanian, A. and S.-J.Wei. 2003. The WTO promotes trade, strongly but unevenly. Working Paper No. 10024. Cambridge, MA: NBER.Google Scholar
  25. Tinbergen, J. 1962. Shaping the world economy. New York: Twentieth Century Fund.Google Scholar

Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Robert C. Feenstra
    • 1
  1. 1.