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Trade Potentials In Gravity Panel Data Models

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Author Info
Luca De Benedictis (DIEF – Dipartimento di Istituzioni Economiche e Finanziarie, University of Macerata, Italy)
Claudio Vicarelli (ISAE - Institute for Studies and Economic Analyses)

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Abstract

In the last decade, a lot of effort has been produced in empirical international trade to explain bilateral volume of trade through the estimation of a gravity equation. A substantial share of this effort by scholars and Institutions regarded the estimate of trade potentials and the inference of trade effects of economic integration. In this paper we show - for the former euro-zone countries trade flows - how the result of a gravity model in terms of potential trade changes introducing time invariant country-specific effects and dynamics. In that case, our estimates give a more accurate account of the spread between actual and potential trade. Moreover, confronting the in-sample trade potential index derived from different estimators we give evidence of the convergence of the index towards the demarcation value corresponding to the equality between observed and predicted trade flows. Finally, we show how the sign of the index is not robust to a change of estimator, casting doubts on the soundness of strong policy implications based on the (in)existence of unrealized trade potentials.

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Publisher Info
Paper provided by ISAE - Institute for Studies and Economic Analyses - (Rome, ITALY) in its series ISAE Working Papers with number 44.

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Length: 52 pages
Date of creation: May 2004
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Handle: RePEc:isa:wpaper:44

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Related research
Keywords: International Bilateral Trade; Gravity Models; Trade Potentials; Dynamic Panel data;

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Find related papers by JEL classification:
C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Estimation
C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Semiparametric and Nonparametric Methods
F10 - International Economics - - Trade - - - General
F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

References listed on IDEAS
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  13. Inmaculada Martínez-Zarzoso & Felicitas Nowak-Lehmann, 2003. "Augmented Gravity Model: An Empirical Application to Mercosur-European Union Trade Flows," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 291-316, November. [Downloadable!]
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  17. Luca De Benedictis & Claudio Vicarelli, 2004. "Trade Potentials In Gravity Panel Data Models," ISAE Working Papers 44, ISAE - Institute for Studies and Economic Analyses - (Rome, ITALY). [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Sergio de Nardis & Roberta De Santis & Claudio Vicarelli, 2008. "The Euro's Effects on Trade in a Dynamic Setting," European Journal of Comparative Economics, Cattaneo University (LIUC), vol. 5(1), pages 73-85, June. [Downloadable!]
    Other versions:
  2. Luca De Benedictis & Roberta De Santis & Claudio Vicarelli, 2005. "Hub-and-Spoke or Else? Free Trade Agreements in the Enlarged EU - A Gravity Model Estimate," Economics Working Papers 037, European Network of Economic Policy Research Institutes. [Downloadable!]
  3. Juan Ruiz & Josep M. Vilarrubia, 2007. "The wise use of dummies in gravity models: export potentials in the Euromed region," Banco de España Working Papers 0720, Banco de España. [Downloadable!]
  4. Sergio de Nardis & Roberta De Santis & Claudio Vicarelli, 2007. "The single currency’s effects on Eurozone sectoral trade: winners and losers?," ISAE Working Papers 88, ISAE - Institute for Studies and Economic Analyses - (Rome, ITALY). [Downloadable!]
    Other versions:
  5. Luca De Benedictis & Roberta De Santis & Claudio Vicarelli, 2005. "Hub-and-Spoke or else? Free trade agreements in the “enlarged” European Union," ISAE Working Papers 52, ISAE - Institute for Studies and Economic Analyses - (Rome, ITALY). [Downloadable!]
    Other versions:
  6. repec:bep:eaptop:v:5:y:2005:i:1:p:1386-1386 is not listed on IDEAS
    Other versions:
  7. Isabel Proença & Maria Fontoura & Enrique Martínez-Galán, 2008. "Trade in the enlarged European Union: a new approach on trade potential," Portuguese Economic Journal, Springer, vol. 7(3), pages 205-224, December. [Downloadable!] (restricted)
  8. Cardamone, Paola, 2007. "A survey of the assessments of the effectiveness of Preferential Trade Agreements using gravity models," Working Papers 7282, TRADEAG - Agricultural Trade Agreements. [Downloadable!]
    Other versions:
  9. Amita Batra, 2004. "India's global trade potential: The gravity model approach," Indian Council for Research on International Economic Relations, New Delhi Working Papers 151, Indian Council for Research on International Economic Relations, New Delhi, India. [Downloadable!]
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