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Foreign Trade Pattern of Nepal: Gravity Model Approach

Author

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  • Laxmi Prasad Prasai

    (Nepal Rastra Bank, Nepalgunj Office)

Abstract

This study examines the overall trade pattern and flow of trade of Nepal by using pooled ordinary least square (OLS) along with one-year lag gross domestic product (GDP). It has also attempted to find the structural shift in the economy after economic liberalization in Nepal. In this study, gravity model is applied with comprehensive panel dataset for 29 years time period covering Nepal’s 94 trading partners. The results appear robust to specification, time period and trade determinants. Following a convention in this field, this study separates exports and imports instead of using total trade turnover. The empirical results are found consistent with the fundamental of gravity model as the study reveals positive coefficients for economic size and negative coefficients for distance. No significant structural break is found in the determinants of trade after economic liberalization. The results from simulation while comparing actual trade with predicted trade show that Nepal’s trade is not distorted by political decisions such as economical sanctions imposed by other countries. The results also suggest that trade with India in comparison to China is quite substantial. The results suggest that Nepal needs trade diversification in general and trade agreement with China in particular to reap the benefits from the trade.

Suggested Citation

  • Laxmi Prasad Prasai, 2014. "Foreign Trade Pattern of Nepal: Gravity Model Approach," NRB Economic Review, Nepal Rastra Bank, Economic Research Department, vol. 26(1), pages 24-43, April.
    • Handle: RePEc:nrb:journl:v:26:y:2014:i:1:p:24
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    References listed on IDEAS

    as
    1. Subash Acharya, 2013. "A Panel Data Analysis of Foreign Trade Determinants of Nepal: Gravity Model Approach," NRB Economic Review, Nepal Rastra Bank, Research Department, vol. 25(1), pages 1-20, April.
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    3. Peter Egger, 2002. "An Econometric View on the Estimation of Gravity Models and the Calculation of Trade Potentials," The World Economy, Wiley Blackwell, vol. 25(2), pages 297-312, February.
    4. Subash Acharya, 2013. "A Panel Data Analysis of Foreign Trade Determinants of Nepal: Gravity Model Approach," NRB Economic Review, Nepal Rastra Bank, Economic Research Department, vol. 25(1), pages 1-20, April.
    5. Chengang Wang & Yingqi Wei & Xiaming Liu, 2010. "Determinants of Bilateral Trade Flows in OECD Countries: Evidence from Gravity Panel Data Models," The World Economy, Wiley Blackwell, vol. 33(7), pages 894-915, July.
    6. Bergstrand, Jeffrey H, 1985. "The Gravity Equation in International Trade: Some Microeconomic Foundations and Empirical Evidence," The Review of Economics and Statistics, MIT Press, vol. 67(3), pages 474-481, August.
    7. Jeffrey A. Frankel, 1997. "Regional Trading Blocs in the World Economic System," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 72, April.
    8. Chan‐Hyun Sohn, 2005. "Does The Gravity Model Explain South Korea'S Trade Flows?," The Japanese Economic Review, Japanese Economic Association, vol. 56(4), pages 417-430, December.
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    Cited by:

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    4. Peter Richter, 2017. "Trade Promotion in Nepal," Foreign Trade Review, , vol. 52(1), pages 48-59, February.

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    More about this item

    Keywords

    Gravity Model; Panel Data; Bilateral Trade; Export; Import; Trade Pattern; Distortion;
    All these keywords.

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F19 - International Economics - - Trade - - - Other
    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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