Augmented Gravity Model of Trade with Social Network Analysis

Abstract

International trade has been one of the most significant economic activities among countries, and its contributions towards a country’s economic growth and sustainable development have been acknowledged. In recent times, international trade and global trade networks have received preeminent attention due to the sharp growth in trade volumes and its contributions to poverty reduction and general welfare. Despite the growth in global trade volumes, there are worrying concerns about the unprecedented changes in international trade patterns and growing imbalances in trade in recent times. Whereas China’s trade volumes have more than tripled over the last decades and have maintained the largest trade surplus spot ahead of Germany, other major trade surplus countries such as Japan, the USA, etc. have become trade deficit countries with their trade volumes increasing at a much slower pace. In view of the growing imbalances in global trade volumes, we use an augmented gravity model of trade that incorporates social network measurement, the real effective exchange rate which is a measurement of international competitiveness, as well as the Linder theory of trade, to investigate the factors that determine the export performance of countries. Using data from 51 countries for 41 years, our results indicate that the GDP of both the home country and the partner country affects the home country’s exports positively. Similarly, the real effective exchange rate REER, trade openness OPEN and dummy variables BORDER, ENGLISH, and EU have produced positive and statistically significant coefficient estimates, and these are in line with our theoretical expectations.

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