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India's Global Trade Potential: The Gravity Model Approach

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  • Amita Batra
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    Abstract

    In this article an augmented gravity model equation has been used to analyze the world trade flows using a sample of 146 countries. The coefficients thus obtained are then used to predict trade potential for India. Ordinary Least Squares with cross-section data for the year 2000 have been used for estimation. The results show that all three traditional “gravity” effects are intuitively reasonable, with statistically significant t-statistic often exceeding 50 in absolute value. Alternative measures of gross national product (GNP) dollar value and purchasing power parity do not alter either the sign or significance of different explanatory variables. Historical and cultural similarities also impact positively upon bilateral trade. As concerns India's trade potential, the model shows that there is tremendous potential with China and trade can more than double if barriers and constraints are removed. Our estimates also indicate a huge potential, of the order of US$6.5 billion, with Pakistan.

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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Global Economic Review.

    Volume (Year): 35 (2006)
    Issue (Month): 3 ()
    Pages: 327-361

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    Handle: RePEc:taf:glecrv:v:35:y:2006:i:3:p:327-361

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    Related research

    Keywords: Augmented gravity model; trade potential; regional distribution;

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    1. Edward Christie, 2002. "Potential Trade in Southeast Europe: a Gravity Model Approach," wiiw Working Papers 21, The Vienna Institute for International Economic Studies, wiiw.
    2. Frankel, Jeffrey & Rose, Andrew K., 2001. "An Estimate of the Effect of Common Currencies on Trade and Income," Working Paper Series rwp01-013, Harvard University, John F. Kennedy School of Government.
    3. Alan V. Deardorff, 1995. "Determinants of Bilateral Trade: Does Gravity Work in a Neoclassical World?," NBER Working Papers 5377, National Bureau of Economic Research, Inc.
    4. repec:wii:bpaper:bowp:011 is not listed on IDEAS
    5. Bergstrand, Jeffrey H, 1985. "The Gravity Equation in International Trade: Some Microeconomic Foundations and Empirical Evidence," The Review of Economics and Statistics, MIT Press, vol. 67(3), pages 474-81, August.
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