International Trade Efficiency, the Gravity Equation, and the Stochastic Frontier

Heejoon Kang and Michele Fratianni

No 2006-08, Working Papers from Indiana University, Kelley School of Business, Department of Business Economics and Public Policy

Abstract: In the gravity equation of international trade, bilateral trade flows are regressed on trading partners’ income and the distance that separates them along with other variables. This widely used equation is traditionally estimated by the ordinary least squares method. We employ an alternative technique of stochastic frontier estimation to assess the potential bilateral trade flows from the same gravity equation. Countries are shown to have low efficiencies in their international trade as the predicted trade from frontier estimation is generally far greater than actual trade. Trade efficiencies are computed and ranked for individual countries, ten geographical regions, and eleven regional trade agreements.

Keywords: efficiency coefficients; OLS residuals; trade gravity; trade potentials (search for similar items in EconPapers)
JEL-codes: C13 F10 F14 (search for similar items in EconPapers)
Date: 2006-03
New Economics Papers: this item is included in nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

Downloads: (external link)
http://kelley.iu.edu/riharbau/RePEc/iuk/wpaper/bepp2006-08-kang-fratianni.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:iuk:wpaper:2006-08

Access Statistics for this paper

More papers in Working Papers from Indiana University, Kelley School of Business, Department of Business Economics and Public Policy Contact information at EDIRC.
Bibliographic data for series maintained by Rick Harbaugh ().