International Trade Efficiency, the Gravity Equation, and the Stochastic Frontier
AbstractIn 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.
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Bibliographic InfoPaper provided by Indiana University, Kelley School of Business, Department of Business Economics and Public Policy in its series Working Papers with number 2006-08.
Date of creation: Mar 2006
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efficiency coefficients; OLS residuals; trade gravity; trade potentials;
Find related papers by JEL classification:
- F10 - International Economics - - Trade - - - General
- F14 - International Economics - - Trade - - - Empirical Studies of Trade
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
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