A Gravity Model Analysis of the Impact On U.S.A.’s Involvement in NAFTA

Abstract

The purpose of this paper is to empirically analyze the United States’ trade patterns in goods based on the gravity model and evaluate whether trade agreements such as the North American Free Trade Agreement (NAFTA) are in the best interest of the US economy. The Gravity Model, US-Canada empirical trade data, and US-Mexico data supports the theoretical model. While it’s hard to incorporate all the factors into the assumptions in estimating the trade among NAFTA, the econometric model proved that there is some positive impact in terms of increasing the overall goods trading volume as a result of the United States implementing NAFTA in the early 1990s. However, it is hard to evaluate the overall benefits due to the limitations of the model such as small sample sizes and few independent variables. The Ricardian model and the Heckscher-Ohlin model are used to provide theoretical grounds.