A BEJEAP Topics article.

Abstract

The paper shows how - using as an example the trade flows between eleven European countries and 31 OECD `reporting' countries - the result of a gravity model, in terms of potential trade, changes substantially when country heterogeneity and dynamics are taken into account.

Comparing the in-sample trade potential index derived from various estimators yields three different results: (a) the average trade potential index poorly represents the distribution of yearly trade potentials; (b) the index converges towards the demarcation value corresponding to the equality between observed and predicted trade flows when country heterogeneity and dynamics are taken into account; (c) the sign of its yearly average is not the right statistic with which to determine the (in)existence of unrealized trade potentials.

Finally, the index derived from a dynamic specification with multilateral fixed-effects is better able to reflect the role played by the time-variant country-specific unobservable element associated with the possible presence of positive or negative trade potentials.

Submitted: November 11, 2004 · Accepted: July 13, 2005 · Published: September 27, 2005

Originally published in Topics in Economic Analysis & Policy.

Recommended Citation

De Benedictis, Luca and Vicarelli, Claudio (2005) "Trade Potentials in Gravity Panel Data Models," Topics in Economic Analysis & Policy: Vol. 5 : Iss. 1, Article 20.
Available at: http://www.bepress.com/bejeap/topics/vol5/iss1/art20

Related Files

TradePotentials.exe (234 kB)
This is an executable rar file containing data and Stata and R scripts