Trade Potentials in Gravity Panel Data Models

Topics in Economic Analysis & Policy, Vol. 5, No. 1, Article 20

26 Pages Posted: 26 Feb 2004

See all articles by Luca De Benedictis

Luca De Benedictis

University of Macerata; Luiss University

Claudio Vicarelli

ISTAT - Italian National Institute of Statistics

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.

Keywords: International bilateral trade, gravity model, trade potentials, dynamic panel data

JEL Classification: C13, C14, F10, F43

Suggested Citation

De Benedictis, Luca and Vicarelli, Claudio, Trade Potentials in Gravity Panel Data Models. Topics in Economic Analysis & Policy, Vol. 5, No. 1, Article 20, Available at SSRN: https://ssrn.com/abstract=506562 or http://dx.doi.org/10.2139/ssrn.506562

Luca De Benedictis

University of Macerata ( email )

Via Crescimbeni 20
Macerata, MC 62100
Italy

HOME PAGE: http://docenti.unimc.it/luca.debenedictis

Luiss University ( email )

Viale Romania 32
Rome, 00198
Italy

Claudio Vicarelli (Contact Author)

ISTAT - Italian National Institute of Statistics ( email )

Via Cesare Balbo 16
00184 Rome, 0185
Italy

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