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Trade Potentials in Gravity Panel Data Models

Author

Listed:
  • De Benedictis Luca

    (DIEF - University of Macerata - Italy, debene@unimc.it)

  • Vicarelli Claudio

    (ISAE, Institute for Studies and Economic Analyses, Rome, Italy, cvicarelli@istat.it)

Abstract

The paper shows how - using as an example the trade flows between eleven European countries and 31 OECD `reporting' countries - the result of a gravity model, in terms of potential trade, changes substantially when country heterogeneity and dynamics are taken into account.Comparing the in-sample trade potential index derived from various estimators yields three different results: (a) the average trade potential index poorly represents the distribution of yearly trade potentials; (b) the index converges towards the demarcation value corresponding to the equality between observed and predicted trade flows when country heterogeneity and dynamics are taken into account; (c) the sign of its yearly average is not the right statistic with which to determine the (in)existence of unrealized trade potentials.Finally, the index derived from a dynamic specification with multilateral fixed-effects is better able to reflect the role played by the time-variant country-specific unobservable element associated with the possible presence of positive or negative trade potentials.

Suggested Citation

  • De Benedictis Luca & Vicarelli Claudio, 2005. "Trade Potentials in Gravity Panel Data Models," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 5(1), pages 1-33, September.
    • Handle: RePEc:bpj:bejeap:v:topics.5:y:2005:i:1:n:20
    DOI: 10.1515/1538-0653.1386
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    Keywords

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    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • F10 - International Economics - - Trade - - - General
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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