Empirical Evidence on the North-South Trade Flows: an Augmented Gravity Model

Giorgio, Ricchiuti (2004): Empirical Evidence on the North-South Trade Flows: an Augmented Gravity Model.

Abstract

Abstract In this paper we analyse the determinants of the trade flows between Developed and Developing Countries using an augmented version of the Gravity Equation. We add two extra variables: the technological distance and the bilateral real exchange rate (RER). The former allows us to analyse the impact of the technological gap on trade structure, the latter to study the movement in the relative prices and their impact on trade pattern. We estimate a Fixed Effects Model (FEM) for different groups of countries. The sign and the numerical value of the coefficients of GDP and Population are different when we analyse separately emerging countries as importers or exporters. This result supports the assumption that determinants of trade, for the two areas (Developed vs Emerging Countries), are not the same. Moreover, as expected, the geographical and the technological distance appear as barriers to trade, and the positive effect on export of a devaluation of the bilateral real exchange rate is confirmed by our results.

• Item Type: MPRA Paper
• Language: English
• Keywords: Gravity Models, Panel Analysis, Exchange Rate, Technological Gap
• Subjects: F - International Economics > F0 - General; C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C23 - Panel Data Models ; Spatio-temporal Models; F - International Economics > F1 - Trade > F19 - Other

References

Ahumada, H. − Garegnani, M. (1999), “Hodrick-Prescott Filter in Practice”, mimeo Anderson, J.E. (1979), “A Theoretical Foundation for the Gravity Equation”, The American Economic Review, vol. 63, pp.106-116 Balassa, B. (1965), “Comparative Advantages in Manufactured Goods: A Reappraisal”, Review of Economics and Statistics 168, pp. 315-319 Bergstrand, J.H. (1985), “The Gravity equation in International trade: some microeconomic foundations and empirical evidence”, Review of economic and statistics, vol. 67, pp. Bergstrand, J.H. (1989), “The generalised gravity equation, monopolistic competition, and the factor-proportions theory in international trade”, The Review of Economics and Statistics 67, pp. 474-481 Deardoff, A.V. (1995), “Determinants of bilateral trade: does gravity work in a neoclassic world?”, NBER Working Paper 5377 Edwards, S. (2000), Capital Flows and The Emerging Economies, The University of Chicago Press Egger, P. (2000), “A note on the proper econometric specification of Gravity equation”, Economic Letters, vol. 66, pp. 25-31 Egger, P. (2002), “An Econometric View on the Estimation of gravity Models and the Calculation of the Trade Potentials”, The World Economy, vol. 25, issue 2, pp. 297-312 Filippini, C. − Molini, V. [2003], “The Determinants of East Asian Trade Flows: A Gravity Equation Approach”, mimeo Feenstra, R. et al. (2001), “Using the Gravity Equation to differentiate among alternative theories of trade”, Canadian Journal of Economics, vol. 34, n. 2 Greene, W. (1997), Econometric Analysis, Macmillan Publishing Company Helpman, E. − Krugman, P. (1985), Market Structure and Foreign Trade, MIT Press Hodrik, R. − Prescott, E. (1981), “Post-War U.S. Business Cycle: An Empirical Investigation”, Working Paper, Carnegie-Mellon University (reprinted in Journal of Money, Credit and Banking, vol. 29, n. 1, february 1997) Hsiao, C. (1995), Random Coefficients Models, in Mathyas, L. − Sevestre, P. (eds.) The Econometrics of Panel Data, Kluwer Academic Publisher, pp. 80-93 Linnemann, H. (1966), An Econometric Study of International Trade Flows, Ed. North Holland Mathyas, L. (1997), “Proper Econometric Specification of The Gravity Model”, The World Economy, vol. 20, pp. 363-368 Mathyas, L. (1998), “The Gravity Model: Some Econometric Consideration”, The World Economy, vol. 21, pp. 397-401 Mathyas, L. − Harris, M. (1998), “The Econometric of Gravity Models”, Melbourne Institute Working Paper, n. 5/98. Tinbergen, J. (1962), Shaping the World Economy: Suggestions for an International Economic Policy. The twentieth Century Fund, New York