REGIONAL COOPERATION AND ECONOMIC INTEGRATION

their mass and inversely proportional to the distance which separates them. In its basic
form, the gravity model states that foreign trade between two countries is a positive
function of their GDP as a proxy variable for their respective supply (conditions in the
source country) and demand (conditions in the host country), and a negative function of
the distance between two countries as a proxy variable for transportation costs. Thus the
basic model has following form:
(1)
If the basic explanatory variables of the gravity equation are distance and economic size,
then theory allows the inclusion of many variables that may explain trade flows between
two observed countries, such as GDP per capita, foreign direct investment, exchange
rate volatility as well as dummies for similar languages, common border and free trade
agreements. The gravity model has gained theoretical foundations due to the development
of new theories of international trade, which assume imperfect competition. Helpman and
Krugman (1985) propose a formalization of the gravity equation in which intra and interindustry
trade approaches are reconsidered. The Bergstrand (1989) model represents an
extension of the Helpman and Krugman model, taking into account the supply and demand
functions of trade flows.
1.2. Literature overview
SOME ASPECTS OF TRADE STATISTICS AND REPORTING
Empirical studies consistently identify GDP per capita differences and size differences
between sending and receiving countries as key drivers of migration between nations, and
indicate that economic theory does not provide a fully satisfactory model for analysing the
causes and effects of migration. This discrepancy between empirical studies and theory has
led to the coexistence of several interdisciplinary approaches which are presented in more
detail in Hatton and Williamson’s (2005) work. For instance the so-called macroeconomic
theories in the neo-classical tradition explain migration by looking at skill differences in
the labour supply and demand between two observed countries as well as the differences
in their wages, while microeconomic theories try to explain the migration incentives of
the individuals involved through cost-benefit deliberations based on lifecycle income and
taking into account investment in human capital. 6
The so-called world dual labour theory explains international migration by means of
push and pull factors, where the pull factors represent the following four characteristics
of modern industrial society: structural wage inflation, lack of motivation for lowstatus
jobs, economic dualism between a human capital-intensive core workforce and
a peripheral workforce, and demographic trends in labour supply. Similarly, other new
theories assume that the decision to migrate is taken on the family level rather than by
individuals. The objective of migration is the collective maximization of the income in
absolute and relative terms in comparison with reference families or neighbours as well
as risk minimization under conditions of undeveloped insurance markets.
Thus Hatton and Williamson’s book presents a synthesis of the theoretical models, and at
the same time shows the non-linearity of the relationships between the stage of development
6
See for instance Andersen (2005)
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