What is Gravity Model of International Trade

The purpose of this chapter is to build and explain the Gravity Model for the trade flows of Albania and 15 of its trade partners for the period of 2001-2016, both theoretically and empirically. The theoretical development of the subject gives an overview of the economic thought over the years regarding the concept of free trade, its benefits and threats, the Central European Free Trade Agreement (CEFTA), and the Gravity Model in order to be able to explain and interpret the patterns of trade between countries. The econometrical analysis illustrates the impact of gross domestic product (GDP) of partner countries, the distance between them, and CEFTA has on the trade flows of Albania. The Gravity Model built in this study supports the theoretical approach and it shows how GDP has positively affected trade flows, while distance has negatively affected trade flows. The impact of CEFTA is insignificant.