An Analysis of Cambodia’s Trade Flows: A Gravity Model

Kim, Sokchea (2006): An Analysis of Cambodia’s Trade Flows: A Gravity Model.

Abstract

This paper aims at investigating the important factors affecting Cambodia’s trade flows to major 20 trading countries from 1994 to 2004. The analysis employs a gravity model with some modifications. Assuming that other factors are constant, the results indicate that the trade flows significantly depend on the economic sizes of both the exporting and importing countries and Cambodia appears to trade more with neighboring countries. In addition, the tests also detect the significant negative impact of exchange rate volatility on the trade flows as well as aggregate exports; however, there is little evidence that the depreciation of Cambodia’s currency, the riel, affects its exports. Nonetheless, the tests using sub-period samples suggest that the positive impacts of bilateral exchange rate depreciation are found significant in sub-period I (1994-1998), but not in sub-period II (1999-2004). Finally, the paper also shows consistent findings that ASEAN membership play little role in boosting trade flows in the region; however, the results in sub-period II suggest that ASEAN membership helps improve border trade which suffered from Asian financial crisis.

• Item Type: MPRA Paper
• Language: English
• Keywords: Trade flows, gravity model, exchange rate volatility, aggregate exports, bilateral exchange rate depreciation, ASEAN, Asian financial crisis
• Subjects: F - International Economics > F1 - Trade > F10 - General; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics

References

Anderson, J. E. (1979). A theoretical foundation for the gravity equation. American Economic Review, 69, 106-116.

Baak, S. J. (2004). Exchange rate volatility and trade among the Asia Pacific countries. Econometric Society 2004 Far Eastern Meetings 724, Econometric Society.

Baak, S. J., Al-Mahmood, A., & Vixathep, S. (2003). Exchange rate volatility and exports from East Asian countries to Japan and the U.S. International Development Series, 2003-2, International University of Japan.

Blanchard O. (2003). Macroeconomics, 3e. Boston: Pearson Education International.

Cheong, C (2004). Does the risk of exchange rate fluctuation really affect international trade flows between countries? Economics Bulletin, 6, 1−8.

De Grauwe, P. (1988). Exchange rate variability and the slowdown in growth of international trade. IMF Staff Papers, no. 35, 63-84.

Dell’Ariccia, G. (1999). Exchange rate fluctuations and trade flows, evidence from the European Union. IMF Staff Papers, no. 46, 315-331.

Evenett, S. J., & Keller, W. (2002). On theories explaining the success of the gravity equation. Journal of Political Economy, 110, 281-316.

Frankel, J. A., & Wei, S. J. (1994). Yen bloc or dollar bloc? Exchange rate policies of the East Asian economies. In Ito, T and A. O. Krueger, eds., Macroeconomic linkages: savings, exchange rates, and capital flows, NBER-East Asia seminar on economics, vol 3, National Bureau of Economic Research, Cambridge.

International Monetary Fund (2004). Cambodia: Ex post assessment of longer-term program engagement. IMF Country Report No. 04/324.

Krugman, P. R., & Obstfeld, M. (2003). International economics: Theory and policy, 6e. Boston: Addison-Wesley.

Lee, C. S., & Park, S. C. (2006). An examination of the formation of natural trading blocs in East Asia. Asian Economic Papers, 4(1), 90-103.

Neak, S. (2005). FDI and trade in Cambodia: Substitutes or complements? Cambodian Economic Review, 1, 99-114.

Thanh, X. N. (2006). An analysis of Vietnam’s foreign trade: Gravity model approach. MA Thesis, International University of Japan.