Bayesian Approach of Gravity Model for Adjustment of Bilateral Trade Integration in Asia

Posted: 15 Jun 2020

Date Written: May 20, 2020

Abstract

Impact of globalization in terms of bilateral trade is renowned strong theoretical underpinning in the literature. Nevertheless, testing a trade integration model of bilateral trade is not adequately estimated with Bayesian approach to provide pragmatic evidences for trade adjustments in Asia. Besides identifying the factors determining trade integration; testing for (i) trade agreements (ii) trade simulation (iii) trade adjustment assistance was estimated using gravity equation with Bayesian method. After performing series of simulation experiments, a relationship between export volume and simulated trade determinants is predicted for trade adjustment. The results of the estimated coefficients on GDP in origin and GDP in destination, population and area of the country of origin and destination are positively significant predicts the export growth. The distance between the countries has negatively significant estimation shows barriers in trade. The model predicts for the trade integration especially towards trade adjustment assistance process in Asia. The Bayesian approach of Gravity model are given the robust estimates for determining the impact factor for the exportation of the trading countries, including the elasticity of total exports with respect to distance and population of destination, and exchange rate of origin are negative, while the proxies of economic size, areas and exchange rates of destination are positive. The estimated parameters are directly the elasticities, in which increases in GDP in a reporter consistent with higher export volumes. The trade agreements, a binary variable representing the specific trade agreements is presence, analyze the ‘trade creation’ and ‘trade diversion’ effects of Regional Trade Agreements. In simulating the scenarios for international trade adjustment according to explanatory indicators quantify trade potential between two partners. Further, evidences of the gravity equation is used for trade potential, and after some adjustments, the estimation is applied for the real trade; and measure bilateral trade resistance or costs term instead of trade flows, and to express these costs as a function to estimate the tariff equivalent of non-tariff barriers for trade adjustment assistance. Finally, the trade adjustment can be implemented across the Asia with evidences and robust estimates of the gravity model. The simulated scenarios, the experiment, for the estimation of the impacts of the trade integration in Asia, predict an increase of GDP, population, exchange rates and area of the destination countries are highly dominant for exportation volume in the Bayesian gravity model for trade adjustment. The results revealed plausible trade agreements significantly affects the trade integration that eventually affect the trade adjustment assistance in Asia.

Keywords: Bayesian Gravity model, Export growth, Trade Agreements, Trade Integration, Trade Adjustment

JEL Classification: F15, F14, F62

Suggested Citation

Jayasooriya, Sujith, Bayesian Approach of Gravity Model for Adjustment of Bilateral Trade Integration in Asia (May 20, 2020). Available at SSRN: https://ssrn.com/abstract=3606203

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