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

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  • Heejoon Kang

    (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)

  • Michele Fratianni

    (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)

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.

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File URL: http://www.bus.indiana.edu/riharbau/RePEc/iuk/wpaper/bepp2006-08-kang-fratianni.pdf
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Bibliographic Info

Paper provided by Indiana University, Kelley School of Business, Department of Business Economics and Public Policy in its series Working Papers with number 2006-08.

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Date of creation: Mar 2006
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Handle: RePEc:iuk:wpaper:2006-08

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Keywords: efficiency coefficients; OLS residuals; trade gravity; trade potentials;

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References

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  4. repec:att:wimass:9713 is not listed on IDEAS
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Citations

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Cited by:
  1. Deluna, Roperto Jr, 2013. "Trade Performance and Potential of the Philippines: An Application of Stochastic Frontier Gravity Model," MPRA Paper 51677, University Library of Munich, Germany.
  2. Deluna, Roperto Jr & Cruz, Edgardo, 2014. "Philippine Export Efficiency and Potential: An Application of Stochastic Frontier Gravity Model," MPRA Paper 53580, University Library of Munich, Germany.
  3. Balogun, Emmanuel Dele, 2007. "Exchange rate policy and export performance of WAMZ countries," MPRA Paper 6233, University Library of Munich, Germany.
  4. Rodolfo Metulini, 2013. "A structural analysis on Gravity of Trade regarding the possibility to remove distance from the model," ERSA conference papers ersa13p520, European Regional Science Association.

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