The Gravity Model Analysis of Bangladesh's Trade: A Panel Data Approach

Abstract

The article applies generalized gravity models to analyze Bangladesh's bilateral trade pattern using the panel data estimation technique. The results reveal that Bangladesh's trade is positively determined by the size of the economies, per capita gross domestic product differential and openness of the trading countries. Bangladesh's exports are positively determined by its income, partner countries' total import demand and openness, but negatively determined by partner countries' income and domestic inflation. Bangladesh's imports are positively determined by income of trading countries and degree of openness of the partner countries and negatively determined by partner countries' inflation. Transportation costs affect Bangladesh's trade negatively.

Keywords:

• gravity model
• panel data
• Bangladesh's trade

Notes

1. For more than four decades the model has been used by many researchers such as Tinbergen (1962), Anderson (1979), Bergstrand (1985, 1989), Helpman and Krugman (1985), Eaton and Kortum (1997), Deardorff (1998), Evenett and Keller (1998), Haveman and Hummels (2004), and others.

2. Empirical research works that have applied gravity model include Bergstrand (1985, 1989), Koo and Karemera (1991), Le, Nguyen, & Bandara (1996), Frankel (1997), Rajapakse and Arunatilake (1997), Sharma and Chua (2000); Jakab, Kovacs, & Oszlay (2001); Soloaga and Winters (2001), Christie (2001), Mátyás, Konya, & Harris (2000), Batra (2006), and others.

3. Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka have formally established the South Asian Association for Regional Cooperation (SAARC) in December 1985. Recently Afghanistan has also joined the Association.

4. SAARC: Bangladesh, India, Nepal, Pakistan, and Sri Lanka; ASEAN: Indonesia, Malaysia, the Philippines, Singapore, and Thailand; NAFTA: Canada, Mexico, and United States; EU: Belgium, Denmark, France, Germany, Greece, Italy, the Netherlands, Portugal, Spain, Sweden, and the United Kingdom; Middle East: Egypt, Iran, Kuwait, Saudi Arabia, Syrian Arab Republic, and the United Arab Emirates; Other: Australia, New Zealand, Japan, China, and Hong Kong.

5. Explanatory variables are selected on the basis of past literature and economic implications that affect trade. Trade tax/tariff may be considered as an important explanatory variable, but data on trade tax are not available for most of the sample countries, and data on tariff are not available at all.

6. Results are not shown. However, these can be provided upon request.

7. The results of autocorrelated error structured models, multicollinearity tests, robustness tests of variables, descriptive statistics, and correlation matrices are not shown. However, these can be provided upon request.