Modeling the Determinants of Ethiopia's Trade Flow: A Gravity Approach
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Date
2009-06
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A.A.U.
Abstract
In this paper we have attempted to analyze the determinants of Ethiopia 50 trade flow with
its major trading partners using the gravity model. We used panel data estimation
technique. The pre estimation Hausman specification test shows that fixed effect is
favoured for both export and import models. Moreover, both the theoretical fi-amework
and Hausman test for endogeneity shows domestic GDP is endogenous in the export
model. Therefore, instrumental variable estimation is used to estimate the export model
wh1ie GLS is used for import model estimation. Post specification results show the major
determinants of Ethiopia 50 export are domestic per capita GDP, trading partners per capita
GDP, distance, trading partners trade policy, domestic infi-astructure, and domestic
institutional quality. All these detelwinants affect export positively while distance has a
negative effect. The results also revealed that the major determinants of Ethiopia:S· import
are home GDP, partners GDP, and home institutional quality. Among the basic gravity
variables GDP works well in explaining import but not distance. The other most important
finding is that variables that can be reflected in prices are little to W01* 1n determimng
import. The insignificant exchange rate and distance variables are examples for this. In
general, the study implies strong 1nstitutions, better infi-astructure and liberalized [rade
policies are required so as to integrate the country with the rest of the world and thereby
benefit fi-om trade.
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Keywords
Words: Gravity Model, Trade flo w, Pan el Data, Fixed Effect Model