Application of Gravity Model to Service Trade: A Comparison of OECD and Non-OECD Countries

Abstract

Background: This study conducts an analysis to investigate the determinants of international service trade flows by utilizing the gravity model and it compares the results of the gravity analysis of OECD and non-OECD countries.

Method: Least-square regression method is utilized to conduct this research. Data collected from UN Service Trade, the World Bank, CEPII, and World Trade Organization are combined and used. Service trade value is used as dependent variable. GDP, per capita GDP, population, distance, contiguous, RTA, language, and colony are used as independent variables.

Results: Gravity model works for service trade with a higher explanatory power for OECD service trade. Independent variables have larger effects on non-OECD service trade.

Conclusions: Service trade of non-OECD countries is much more sensitive to the distance and to the changes in economic size and individual income. RTA and language, too, have larger impact on service trade of non-OECD countries.