Gravity Model: Understanding Colombian International Trade

Name: Daniel A. Orjuela Boyaca

Mentor: Shruti Sharma

Abstract: We are interested in understanding determinants of Colombia’s international trading patterns, and if these were impacted by important economic and political events. We use the “gravity-model” approach to examine how the Gross Domestic Product and distance between trading partners of Colombia impact its trade. We collected data on 179 of trading partners from the World Bank for the years 2002-2018. In 2014 the Colombian government started a peace treaty with the Revolutionary Armed Forces which was expected to have a positive impact on the economy, however, this coincided with the oil crisis in 2014 which was especially a shock to Colombia’s international trade. When we analyzed the summary statistics, we find a drop in GDP, and also a decline in exports and imports from 2014-2016. In terms of our model, we checked if these events impacted the relationship between the independent variables (GDP/distance) and our main variables of interest- exports and imports. Our multivariate regressions show that there is a positive and significant impact of GDP of the trade partner on Colombia’s trade, and a negative and significant impact of geographical distance on Colombia’s trade. For each percentage point increase in GDP of the trading partner, Colombia’s exports increase by 1.62% and imports increase by 1.68%. We find that these relationships are not impacted (weakened or strengthened) by the events of 2014. In future work, we hope to expand our model by including more variables to better capture the impact of these political and economic events on Colombia’s trade.