Bilateral trade

China

Archaeology

Economics

International trade

Gravity equation

Geography

Econometrics

Trade theory

International economics

Trade barrier

New trade theory

Gravity model of trade

Contemporary Economic Policy

The gravity equation is the workhorse model of trade. Despite solid theoretical foundations and clear gains from theory‐consistent policy analysis, there are still gaps between gravity theory and empirics. This paper focuses on domestic trade flows, and I argue that there are significant benefits from adhering to theory by estimating gravity equations with domestic (in addition to international) trade flows. I review the related literature and synthesize 15 arguments for using domestic trade flows in gravity estimations. The analysis reveals the need for further theory contributions and new data developments, and points to opportunities for more policy applications.

On the role of domestic trade flows for estimating the gravity model of trade