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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.

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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.

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