Tradeflow Study - UNDP Black Sea Trade and Investment Promotion ...
Tradeflow Study - UNDP Black Sea Trade and Investment Promotion ...
Tradeflow Study - UNDP Black Sea Trade and Investment Promotion ...
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Annex 2. Methodology for calculating trade potential <strong>and</strong> results<br />
Annex 2.1. Methodological aspects of Gravity Equations<br />
The <strong>Trade</strong> potential calculated using the gravity equation is obtained from the International<br />
<strong>Trade</strong> Centre’s <strong>Trade</strong>Sim model. <strong>Trade</strong>Sim takes into account a number of factors such as<br />
market size, conflicts, tariffs, cultural proximity, distance between cities , etc. The <strong>Trade</strong>Sim<br />
model calculates the expect trade that would take place between countries based on these<br />
variables. Formally, the equation is given as:<br />
X<br />
ijk<br />
ik<br />
<br />
jk<br />
0k<br />
1<br />
k<br />
ln Dij<br />
2k<br />
ln Tijk<br />
3k<br />
ln Bij<br />
4k<br />
ln Lij<br />
5k<br />
ln Cij<br />
6k<br />
G<br />
ij<br />
<br />
ijk<br />
Where i: exporting country; j: importing country; k: sector<br />
X ijk : <strong>Trade</strong> in sector k from country i to country j<br />
D ij : Distance between country i <strong>and</strong> country j<br />
B ij : Border between country i <strong>and</strong> country j (Equals 1 if bordering; 0 otherwise)<br />
T ijk : Tariff between country i <strong>and</strong> country j in sector k<br />
L ij : Language common to country i <strong>and</strong> country j (Equals 1 if the same; 0 otherwise)<br />
C ij : Existence of conflict between country i <strong>and</strong> country j (Equals 1 if conflict; 0 otherwise)<br />
G ij : Bilateral measure of geographical location<br />
ik , jk : Multilateral resistence terms<br />
With only minor exceptions (for example for energy products), the model yields the expected<br />
results from economic theory, namely that tariffs ( 2 ) impact negatively on bilateral trade, as<br />
do conflicts ( 5 ) <strong>and</strong> transport costs – measured by distances between major trading cities<br />
( 1 ). On the other h<strong>and</strong>, the economic size of trading partners (measured by GDP) ( 0 ),<br />
bordering countries ( 3 ), <strong>and</strong> common languages ( 4 ) have a positive influence on bilateral<br />
trade flows. The bilateral measure of geographical location ( 3 ) captures country specific<br />
characteristics based on the assumption that countries with similar geographical<br />
characteristics are likely to have similar comparative advantages <strong>and</strong> thus trade less. The<br />
bilateral location variable is captured using the country’s latitude, taking a value of 1 if both<br />
countries belong to the same hemisphere, using a 20° latitude line as division criterion, <strong>and</strong> 0<br />
otherwise.<br />
<strong>Trade</strong> data is constructed from UNSD Comtrade Database for averages of 2002-03 data.<br />
Tariff data is obtained from MacMaps <strong>and</strong> sectors are defined according to the ISIC 19<br />
industrial sectors. Distances are calculated according to the great circle distance between<br />
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