Trade policy analysis with a gravity model
We compare the latter results to those reported in the literature and find that they are comparable. In addition, the model produces reasonably good out-of-sample forecasts of trade flow developments 3 to 6 years in the future. Hence, the gravity model can predict the impact of changes in trade policy on export flows well over the medium term. Given these results, we argue that the baseline gravity model would be a valuable addition to the CPB toolbox. However, CPB's analysis of the impact of trade policy on trade would benefit from supplementary tools, for example, to better model short-run trade flows. We conclude our report by discussing potential extensions to the gravity model.