Why should the gravity model be taught in business education?

Abstract

Abstract The aim of this paper is to critically analyze the papers from the literature mainstream regarding the gravity model and to identify the main findings. The paper highlights the importance of studying the gravity model in the tertiary business education. Introduced by Tinbergen (1962), the gravity model was widely used to analyze the international trade flows in theoretical, as well as empirical studies. Alongside the classical determinants, economy size, market size and geographical distance, other variables which influence the trade flows were found: trade agreements, foreign direct investments, exchange rate, trade taxes, cultural distance, migration, remoteness, knowledge capital, technological development. There are many controversies regarding the zeroes problem within the model, as well as many controversies on the solutions of the zeroes problem. A meta-analysis and systematic review of the relevant literature in the last 56 years was conducted. From author’s knowledge, this study is the most extended literature review on the gravity model, covering more than 50 years of research. Despite all the theoretical controversies, the gravity model proved to be a robust one, with a great power of explanation in more than 80% of the dynamics and structure of the trade flows. Therefore, the gravity model should be considered a valuable analysis tool in teaching and studying in tertiary business education: international trade, econometrics, statistics, trade policy and so on.