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The Gravity Model and Trade Efficiency: A Stochastic Frontier Analysis of Potential Trade

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  • Geetha Ravishankar Author name: Marie Stack

Abstract

The opening up process of the eastern European countries is characterised by an increasing degree of trade integration with their Western neigbouring countries. Typically, the degree of East West trade integration is assessed by comparing actual trade volumes with potential trade volumes projected from the gravity model parameters estimated for a group of countries that best represent normal trade relations. This approach, however, does not compare trade levels against a maximum level of trade feasible for the group of eastern European countries. This paper by using a stochastic frontier specification of the gravity model is able to identify the efficiency of trade integration relative to maximum potential levels. The findings, based on a panel data set of bilateral exports from 17 Western European countries to the 10 new member states over the 1994 2007 period, indicate a high degree of East West trade integration close to two thirds of frontier estimates, suggesting a low degree of trade resistances.

Suggested Citation

  • Geetha Ravishankar Author name: Marie Stack, 2013. "The Gravity Model and Trade Efficiency: A Stochastic Frontier Analysis of Potential Trade," NBS Discussion Papers in Economics 2013/04, Economics, Nottingham Business School, Nottingham Trent University.
    • Handle: RePEc:nbs:wpaper:2013/04
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    More about this item

    Keywords

    Behavioural expectation; rational expectation; bank crisis; indirect inference.;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F15 - International Economics - - Trade - - - Economic Integration

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