Does Relative Location Matter for Bilateral Trade Flows? An Extension of the Gravity Model

This study extends the gravity model to include a new measure of the trading partners’ location relative to other countries. The proposed measure is close in spirit to the theory of gravity, since it is based on the concept of the world trade center. The measure is statistically significant when the gravity equation is estimated using the intra-OECD trade flows. The results indicate that two countries located at the periphery rely more on bilateral trade than their centrally located counterparts. The study shows that omitting the location measure influences the estimated effects of regional country groupings in a systematic manner.