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An Empirical Test of Trade Gravity Model Criteria for the West African Monetary Zone (WAMZ)

Balogun, Emmanuel Dele (2008): An Empirical Test of Trade Gravity Model Criteria for the West African Monetary Zone (WAMZ).

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Abstract

This study gauged the effects of output co-variability, intra-industry intensity of trade and endogenous features of the countries such as common language, border, or colonizer, etc. on bilateral trade. The results confirm that similarities in business cycles influence bilateral trade among the countries. While the positive effects of the real GDP variable coefficient estimate confirms the assertion in the literature that larger countries exert a greater gravitational pull on imports and push to exports (Nigeria accounts for approximately 60 per cent of the GDP, land mass and population of the group), the negative sign of the per capita income variable coefficient estimate is also consistent with expectation that poorer countries (in per capita terms) tend to have lesser trade. Also, the coefficient estimates of the intra-industry trade intensity variables were significant. While the positive sign of the intra-industry trade in agricultural commodities suggest that it can, ceteris paribus, lead to trade creation within the region, the negative sign of the agricultural and mineral commodities is reflective of the Krugman’s specialization effects arising from the fact that Nigeria is a major exporter of crude oil. It was inferred that these results portends that improvements in per capita incomes of WAMZ countries could invariably be associated with greater trade in the absence of trade barriers and if supported with common currency. This was confirmed by the significance of the trade dummies included in the model.

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