An Econometric Study of Trade Creation and Trade Diversion in the EEC, LAFTA and CMEA : A Simple Application of the Gravity Model

In a modified version of the Gravity Model, appropriate dummy variables have been introduced to analyze the effects of both trade creation and trade diversion by the three economic organizations of the EEC (European Economic Community), the LAFTA (Latin American Free Trade Association) and the CMEA (Council of Mutual Economic Assistance), for the period 1960 to 1990, with five year intervals the subject of measurement. Using a similar approach, the situation of non-aligned trade by Japan is analyzed, with particular interest in the effects of such activities by these three institutions upon their trade with Japan, and Japanese commerce in general. The subsequent results show that these economic institutions display the effects on the amount of trade which occurs within their respective organizations, or intra-union trade, while at the same time expanding their volume of trade with non-member countries, despite being commercial activity taking place outside their respective unions.