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The Structure and Growth of World Trade, and the Role of Europe in the Global Economy

Sufrauj, Shamnaaz and Schiavo, Stefano and Riccaboni, Massimo (2014): The Structure and Growth of World Trade, and the Role of Europe in the Global Economy.

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Abstract

This paper presents a simple stochastic model of proportionate growth to describe international trade and it applies this set-up to the relationship between export dynamics and economic development. Trade flows are assumed to grow as a geometric Brownian motion while new trade links follow a preferential attachment mechanism, and these two processes are assumed to be independent. This simple set-up accurately describes many of the empirical features that characterize the structure and growth of the international trade network. Furthermore, it reconciles diverging views of industrial policy in the economic development literature: although export is very concentrated so that large bilateral flows are rare, countries characterized by a large number of export relations are more likely to capture such “big hits”. The stochastic model provides a simple benchmark against which we can assess countries’ export performance. We then investigate the determinants of deviation of empirical data from the predictions of the model in terms of the number of “big hits”.

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