Importance of the gravity model within the trade theories and testing for the Turkish economy

The purpose of this study is to investigate the importance of the gravity model within trade applications, problems faced in analyzes and solution suggestions since its first version by Tinbergen (1962). For that purpose, the relationship and the accommodativeness of the model with trade theories in both theoretical and practical perspectives are to be shown. Subsequently, a theoretical foundation of the gravity model has been discussed with Helpman-Melitz-Rubinstein (2008) model in the context of firm heterogeneity. Zero trade flows have gained economical meaning by HMR (2008) model since it has been explained with fixed trade costs and a range of firm productivity. Another focus of this study is about the solution of biased estimates with the omission of multilateral resistance terms that have been designated as the golden mistake by Krugman (1995). Anderson & van Wincoop (2003) brought a new solution to this problem by developing structural gravity model. This study aims to test Turkey's trade flows with the context of Tinbergen's (1962) basic gravity model and Anderson & van Wincoop's (2003) structural gravity model. For this purpose, trade relations of Turkey with its 139 partner is to be estimated by using OLS, FGLS and NLS methods for 2010–2018 times period with 2,502 observations. Afterwards, structure of the world trade of 140 countries is to be estimated by country-specific fixed effects model for the same 2010–2018 times period with 138,845 observations. Thus, the explanatory power of gravity models for estimating trade flows and trade costs has been targeted to present.