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Model

At first, the study of the gravity model is not a deduction from various trade theories but based on intuitive judgments of the realistic relations. That is to say, the empirical study comes before theoretical research. The gravity model has been widely used in the study of international trade since the past fifty years. The first gravity model applied to the field of international trade was proposed by the first economic Nobel laureate Jan Tinbergen (1962), who predicted that bilateral trade flows between two countries is a function related to the economic size and distance between two countries. Using this model, Tinbergen established that the one-way trade flows between the two economies is proportional to their respective economic scale, and inversely proportional to their distance. Originally, it is specified as a log-linear regression equation and many variables are augmented to the basic model to test whether they will affect the trade between two countries.

The gravity model is a widely used model in analyzing bilateral trade flow since the 1960s. To illustrate the asymmetries in trade flows composed by a number of countries, Tinbergen (1962) establish a trade gravity model. It evolves from Newton's Theory of Gravitation, considering that the volume of trade between two countries is proportional to their economic scale and negatively proportional to their distances. The basic equation is shown as below:

(1)

Where Xij is country i's real trade flow with country j, and equals imports plus exports. A is a coefficient. Yi is the GDP of country i and Yj is the GDP of country j. YiYj is the GDP product of the two countries. Dij is the distance between the two countries, usually estimated by the distance of the two countries' capital or economic center. Since the model is non-linear, we can take the natural logarithm from both sides of the equation at the same time to get the linear one:

(2)

In equation (2), lnXij, ln(YiYj), lnDij are the natural logarithm of Xij,YiYj and Dij respectively. are regression coefficients to be estimated. is the standard error.

Generally speaking, GDP reflects the economic scale of a country. Therefore, there expected to exist a tendency that the higher GDP of country i and j, the larger trade flow from country i to country j. That is to say, the bilateral trade between country i and j has a positively relationship with their GDP. Since this paper is to study whether entry into the WTO/GATT or RTA will increase China's international trade, besides those traditional variables which have been studied by many scholars and experts before, this paper will assume a new variable, the marine financial derivations Baltic Exchange Dry Index (BDI), to test whether it has any relation with trade between trade partners.

BDI is an important index to study the future performance and investment value of shipping stocks, as well as one of the leading indicators of international trade. Since the BDI is calculated as a result of the spot freight which weighted by three main ship types worldwide which I have mentioned above, therefore, the change of the freight price would make BDI fluctuated. If the coefficient of BDI is positive, it could mean that a rising freight is a reflection of an increasing international trade. In fact, if the freight keeps increasing, it should mean that the demand for the sh