International Trade Efficiency, the Gravity Equation, and the Stochastic Frontier

27 Pages Posted: 21 Dec 2006

See all articles by Heejoon Kang

Heejoon Kang

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy

Michele U. Fratianni

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy; Universita' Politecnica delle Marche

Date Written: June 2006

Abstract

In the gravity equation of international trade, bilateral trade flows are regressed on trading partners' income and the distance that separates them along with other variables. This widely used equation is traditionally estimated by the ordinary least squares method. We employ an alternative technique of stochastic frontier estimation to assess the potential bilateral trade flows from the same gravity equation. Countries are shown to have low efficiencies in their international trade as the predicted trade from frontier estimation is generally far greater than actual trade. Trade efficiencies are computed and ranked for individual countries, ten geographical regions, and eleven regional trade agreements.

Keywords: Efficiency coefficients, OLS residuals, trade gravity, trade potentials

JEL Classification: F10, F14, C13

Suggested Citation

Kang, Heejoon and Fratianni, Michele, International Trade Efficiency, the Gravity Equation, and the Stochastic Frontier (June 2006). Available at SSRN: https://ssrn.com/abstract=952848 or http://dx.doi.org/10.2139/ssrn.952848

Heejoon Kang

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy ( email )

Bloomington, IN 47405
United States

Michele Fratianni (Contact Author)

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy ( email )

Bloomington, IN 47405
United States
812-855-3360 (Phone)
812-855-3354 (Fax)

Universita' Politecnica delle Marche ( email )

Piazzale Martelli, 8
60121 Ancona
Italy
39-071-2207120 (Phone)

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