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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.

Suggested Citation

  • Oleksandr Shepotylo, 2009. "Gravity with zeros: estimating trade potential of CIS countries," Discussion Papers 16, Kyiv School of Economics.
  • Handle: RePEc:kse:dpaper:16
    Note: Under review in Journal of International Economics
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    File URL: http://repec.kse.org.ua/pdf/KSE_dp16.pdf
    File Function: March 2009
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    References listed on IDEAS

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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. Fatima Olanike Kareem & Olayinka Idowu Kareem, 2014. "Specification and Estimation of Gravity Models: A Review of the Issues in the Literature," RSCAS Working Papers 2014/74, European University Institute.
    3. 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.
    4. Drapkin, I. & Mariev, O. & Chukavina, K., 2015. "Inflow and Outflow Potentials of Foreign Direct Investment in the Russian Economy: Numerical Estimation Based on the Gravity Approach," Journal of the New Economic Association, New Economic Association, vol. 28(4), pages 75-95.
    5. Kareem, Fatima Olanike & Martinez-Zarzoso, Inmaculada & Brümmer, Bernhard, 2016. "Fitting the Gravity Model when Zero Trade Flows are Frequent: a Comparison of Estimation Techniques using Africa's Trade Data," Discussion Papers 230588, Georg-August-Universitaet Goettingen, GlobalFood, Department of Agricultural Economics and Rural Development.
    6. Gomez-Herrera, Estrella & Martens, Bertin & Turlea, Geomina, 2014. "The drivers and impediments for cross-border e-commerce in the EU," Information Economics and Policy, Elsevier, vol. 28(C), pages 83-96.
    7. 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.
    8. Estrella Gómez-Herrera, 2013. "Comparing alternative methods to estimate gravity models of bilateral trade," Empirical Economics, Springer, vol. 44(3), pages 1087-1111, June.
    9. Biswas, Trina & Kennedy, P. Lynn, 2015. "The Role of E-governance on Agricultural Trade," 2015 Annual Meeting, January 31-February 3, 2015, Atlanta, Georgia 196865, Southern Agricultural Economics Association.

    More about this item

    Keywords

    Gravity model; trade potential; out-of-sample predictions;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F17 - International Economics - - Trade - - - Trade Forecasting and Simulation

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