One hundred years ago the Austro-Hungarian Empire included a vast and diverse territory in Central and Eastern Europe. This empire operated as one economic unit and many of the regions within the empire, such as Austria, Hungary, the Czech lands, and others, began to develop their modern economies within the framework of this empire. Over the succeeding one hundred years, two world wars and the Cold War split the empire into 13 different countries, divided down the middle into capitalist and communist states for almost 70 years. Since the collapse of communism, many of these countries are rapidly integrating into the greater European economy. This integration has seen large amounts of trade flowing both into and out of Central and Eastern Europe, but what is determining trade flows? Can geography and trade agreements, two main determinants of trade, alone explain trade flows in the region or is there some other factors determining trade? What role does history play in determining trade flows? This paper will observe the impact of historical connection as measured by former membership in the Austro-Hungarian Empire using a gravity model of trade.
A gravity model is inspired by the physics concept that gravity flows are affected by the magnitude and distance of two objects. The gravity model of trade attempts to apply this concept to trade flows between two nations and seeks to predict trade by measuring the magnitude of the trading economies, distance apart, access to the ocean, and several other factors. With this model we can observe trade flows as well as examine the determinants of trade. Using this model, this paper will seek to observe the impact of historical connection as a potential explanatory variable of trade flows. This paper will contend that past historical connection does play a role in determining trade patterns by observing the nations of the former Austro-Hungarian Empire and their trade flows.