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Stochastic Gravity Model and Trade Efficiency for Indonesia

Author

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  • Milda Irhami

    (Faculty of Economics, University of Indonesia)

Abstract

After four decades of open economic policies, Indonesia’s exports to GDP ratio is still small compared to its neighbours indicating low trade efficiency in Indonesia’s bilateral trade. Using the stochastic frontier analysis applied to the gravity model of trade, this study analyses trade frontier and efficiency for Indonesia. This analysis is important to provide an insight in trade policy measures. The model is constructed based on two equations, the stochastic gravity model and trade efficiency model. This study estimated the determinants of trade and trade efficiency using exports as the dependent variable. The results confirm the standard gravity model result on relationship between GDP and distance to volume of exports. The results also indicate that trade intensity is an important determinant for Indonesia’s bilateral exports. The Asian economic crisis brought a contraction in bilateral trade with a surprising increase in exports in 1998. This study also found that trade efficiency is influenced by both openness and regional integration. The results indicate that Indonesia should negotiate a more open economic policy with its trading partners and continue an active participation in regional organization

Suggested Citation

  • Milda Irhami, 2007. "Stochastic Gravity Model and Trade Efficiency for Indonesia," Economics and Finance in Indonesia, Faculty of Economics and Business, University of Indonesia, vol. 55, pages 177-199, August.
    • Handle: RePEc:lpe:efijnl:200710
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    More about this item

    Keywords

    Gravity Model; Trade; Export; Regional Integration;
    All these keywords.

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F10 - International Economics - - Trade - - - General
    • F15 - International Economics - - Trade - - - Economic Integration

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