Gravity Model and International Trade: The Case of Western Balkan Countries

The magnitude of international trade flows may be affected by social and cultural variables, such as population structure, common language and colonial links; economic and political variables, such as economic sizes or incomes, trade costs, trade agreements, exchange rate and relative prices; technical variables, such as technology advancement, infrastructure condition and geographical distance; and some more complex variables to be anticipated such as political conflicts, meteorological conditions and natural catastrophes. The main objective of this work is the empirical analysis of the determinants of bilateral trade between Western Balkan countries and the most important partners through the gravity theory. We propose a particular gravity equation for trade, including basic and experimental independent variables. We made use of R software for the econometric analysis, considering a panel data estimator for the dependent variable. The statistical effect of the considered explanators is generally confirmed and the resulting adjusted R-squared is relatively high.