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The Role of Gravity Models in Estimating the Economic Impact of Brexit

Author

Listed:
  • Graham Gudgin
  • Ken Coutts
  • Neil Gibson
  • Jordan Buchanan
Abstract
The predictions of the Treasury, OECD and IMF for the long-term impact of Brexit remain influential. They provide an important context for the Brexit negotiations and underpin the belief of Scottish and Irish nationalists that Brexit strengthens their case for independence or Irish unity. Because these predictions have received limited scrutiny they are examined in detail in this paper. The bases of the predictions are similar for each of the three organisations. In each case estimates are made of the impact of Brexit on trade and on foreign direct investment. This is followed by an estimate of the knock-on effect on productivity. The OECD and IMF also include an assessment of the impact of lower migration. The aggregate impact of these factors is then fed into a macro-economic model to obtain a forecast for GDP. Much of the final impact depends on the estimate for trade which, in each case, is assessed using a ‘gravity model’. Because gravity models are inaccessible to the general public, they are explained here in comprehensible terms. In addition the Treasury’s gravity model results are replicated and examined in detail. Our conclusion is that different versions of the model give a range of results and that most versions give a smaller trade impact than that reported by the Treasury, OECD or IMF. In particular, equations which estimate the average impact of EU membership on exports of goods tend to over-predict UK exports to the EU. This implies that the average impact of EU membership applies less to the UK than to the other EU member states. The further implication is that these official predictions of the impact of Brexit are overly pessimistic.

Suggested Citation

  • Graham Gudgin & Ken Coutts & Neil Gibson & Jordan Buchanan, 2017. "The Role of Gravity Models in Estimating the Economic Impact of Brexit," Working Papers wp490, Centre for Business Research, University of Cambridge.
    • Handle: RePEc:cbr:cbrwps:wp490
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    References listed on IDEAS

    as
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    Cited by:

    1. Begg Iain, 2019. "No Longer “The Economy Stupid”: How Muddled Economics Contributed to a Chaotic Brexit," The Economists' Voice, De Gruyter, vol. 16(1), pages 1-14, December.
    2. Harald Oberhofer & Michael Pfaffermayr, 2021. "Estimating the trade and welfare effects of Brexit: A panel data structural gravity model," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 54(1), pages 338-375, February.
    3. Raffaele Giammetti, 2019. "Tariffs, Domestic Import Substitution and Trade Diversion in Input-Output Production Networks: how to deal with Brexit," Mo.Fi.R. Working Papers 152, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
    4. J., Julio, 2019. "Brexit trade impacts' and Mercosur's negotiations with Europe," MPRA Paper 94885, University Library of Munich, Germany.
    5. Ellalee, Haider & Alali, Walid Y., 2018. "The Brexit Impact on Inward FDI in the UK," MPRA Paper 117510, University Library of Munich, Germany, revised 20 May 2018.
    6. Nogues, Julio, 2018. "Brexit trade impacts and Mercosur's negotiations with Europe," MPRA Paper 87416, University Library of Munich, Germany.
    7. Ruiz Estrada Mario Arturo & Evangelos Koutronas & Donghyun Park, 2019. "The economic Gordian Knot of Brexit: an East and Southeast Asian perspective," Quality & Quantity: International Journal of Methodology, Springer, vol. 53(6), pages 2797-2820, November.
    8. repec:wsr:wpaper:y:2018:i:187 is not listed on IDEAS
    9. Alali, Walid Y. & Ellalee, Haider, 2018. "The Brexit Impact on Inward FDI in the UK," EconStor Preprints 274655, ZBW - Leibniz Information Centre for Economics.
    10. Sae Won Chung & Yongmin Kim, 2019. "The Truth behind the Brexit Vote: Clearing away Illusion after Two Years of Confusion," Sustainability, MDPI, vol. 11(19), pages 1-16, September.
    11. Nogues, Julio, 2018. "Note on UK agro industrial trade under a hard Brexit," MPRA Paper 85643, University Library of Munich, Germany.

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    More about this item

    Keywords

    Brexit; Gravity Model; H M Treasury; IMF; Trade: macroeconomic forecasts; OECD;
    All these keywords.

    JEL classification:

    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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