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Gravity with zeros: estimating trade potential of CIS countries

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  • Oleksandr Shepotylo

    ()
    (Kyiv School of Economics and Kyiv Economics Institute)

Abstract

Arguably, the Commonwealth of Independent States (CIS) countries are not as integrated into the world markets as the EU countries or Southeast Asian countries. Trade flows of the CIS countries are not well diversified in terms of either trading partners or composition of exports. In order to compare the degree of export diversification of the CIS countries relative to other countries, we employ the gravity model that proved to be very successful in explaining geographical patterns of trade across countries. The gravity equation is estimated ‘out-of-sample’, meaning that we do not include data on trade flows of the CIS countries in the sample while calculating parameters of the gravity equation. Egger (2002) argued forcefully that the ‘in-sample’ estimation of the trade potential based on the deviation of residuals from the linear prediction is incorrect because large deviations of residuals in the gravity equation based on the in-sample method is not evidence of large deviations of trade from its potential, but rather an indicator of the model misspecification. In addition, we explicitly deal with the problems of zero trade flows and firm’s heterogeneity that become more severe at higher levels of disaggregation such as at the level of sectors of the economy.

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Bibliographic Info

Paper provided by Kyiv School of Economics in its series Discussion Papers with number 16.

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Date of creation: Mar 2009
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Handle: RePEc:kse:dpaper:16

Note: Under review in Journal of International Economics
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Keywords: Gravity model; trade potential; out-of-sample predictions;

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References

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Cited by:
  1. Fatima Olanike Kareem & Olayinka Idowu Kareem, 2014. "Specification and Estimation of Gravity Models: A Review of the Issues in the Literature," RSCAS Working Papers, European University Institute 2014/74, European University Institute.
  2. Kurmanalieva, Elvira & Vinokurov, Evgeny, 2011. "Holding together or falling apart:Results of gravity equation of the CIS trade," MPRA Paper 32003, University Library of Munich, Germany.
  3. Estrella Gómez-Herrera, 2013. "Comparing alternative methods to estimate gravity models of bilateral trade," Empirical Economics, Springer, Springer, vol. 44(3), pages 1087-1111, June.
  4. 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.

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