Untangling gravity

The gravity model is a workhorse for explaining bilateral trade flows. Trade between two countries increases by their economic size and decreases by both their physical and economic distance. However, disentangling the impact of different variables in both the theoretical and empirical gravity model is difficult. This hampers the interpretation and identification of the impact of important variables. This dissertation contributes to the untangling of the gravity model in three ways. First, it derives a theoretical real gravity equation that reveals theoretical insights that were hidden in the traditional nominal equation. Second, this dissertation develops an econometric method, called untangling normalization, which helps to better understand and identify third country effects. Finally, it develops an economic integration index that exploits the gradual and bilateral nature of economic integration to estimate the impact of different economic integration stages. The estimates are, for example, used to investigate the impact of different Brexit scenarios.