49

Two opposite forces determine the intensity of bilateral trade between countries: an attractive force (country size and income) and a repulsive force (distance and other barriers to trade). Building on a now well-established theoretical basis and minimum data requirements, gravity equations – which combine the above variables – have become one of the most popular tools for analysing international trade. And calculating trade potential is certainly their most widely used application: a gravity equation is estimated and then used for a simulation. This paper examines the problems associated with this methodology and offers original solutions, focusing particularly on choice of estimation sample. A gravity model estimated for 75 heterogeneous countries trading in 14 sectors covering 261 industries is used to illustrate this approach.