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Does the Gravity Model Explain India Direction of Trade? A Panel Data Approach

  • Bhattacharyya Ranajoy
  • Banerjee, Tathagata
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    In this paper we apply the gravity model to the panel consisting of India’s yearly bilateral trade data with all its trading partners in the second half of the twentieth century. The main conclusions that emerge from our analyses are: (1) The core gravity model can explain around 43 per cent of the fluctuations in India’s direction of trade in the second half of the twentieth century (2) India’s trade responds less than proportionally to size and more than proportionally to distance (3) Colonial heritage is still an important factor in determining India’s direction of trade at least in the second half of the twentieth century (4) India trades more with developed rather than underdeveloped countries, however (5) size has more determining influence on India’s trade than the level of development of the trading partner.

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    Paper provided by Indian Institute of Management Ahmedabad, Research and Publication Department in its series IIMA Working Papers with number WP2006-09-01.

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    Handle: RePEc:iim:iimawp:wp01977
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    1. Kim, MinKyoung & Cho, Guedae & Koo, Won W., 2003. "Determining Bilateral Trade Patterns Using A Dynamic Gravity Equation," Agribusiness & Applied Economics Report 23538, North Dakota State University, Department of Agribusiness and Applied Economics.
    2. Robert C. Feenstra & James R. Markusen & Andrew K. Rose, 2001. "Using the gravity equation to differentiate among alternative theories of trade," Canadian Journal of Economics, Canadian Economics Association, vol. 34(2), pages 430-447, May.
    3. James E. Anderson & Eric van Wincoop, 2003. "Gravity with Gravitas: A Solution to the Border Puzzle," American Economic Review, American Economic Association, vol. 93(1), pages 170-192, March.
    4. Feenstra, Robert & Markusen, James R. & Rose, Andrew K, 1998. "Understanding the Home Market Effect and the Gravity Equation: The Role of Differentiating Goods," CEPR Discussion Papers 2035, C.E.P.R. Discussion Papers.
    5. repec:att:wimass:9713 is not listed on IDEAS
    6. Simon J. Evenett & Wolfgang Keller, 2002. "On Theories Explaining the Success of the Gravity Equation," Journal of Political Economy, University of Chicago Press, vol. 110(2), pages 281-316, April.
    7. Brun, Jean-François & Carrère, Céline & de Melo, Jaime & Guillaumont, Patrick, 2002. "Has Distance Died? Evidence from a Panel Gravity Model," CEPR Discussion Papers 3500, C.E.P.R. Discussion Papers.
    8. Anderson, James E, 1979. "A Theoretical Foundation for the Gravity Equation," American Economic Review, American Economic Association, vol. 69(1), pages 106-16, March.
    9. Baier, Scott L. & Bergstrand, Jeffrey H., 2001. "The growth of world trade: tariffs, transport costs, and income similarity," Journal of International Economics, Elsevier, vol. 53(1), pages 1-27, February.
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