Export Potential and Basis of Trade of Climate Smart Goods and Specialized Products of Ecuador Using Gravity Analysis

Gravity Analysis

We use the gravity analysis to explain the basis of trade of CSG between Ecuador and countries in MERCOSUR (nine excluding Ecuador), EU27, NAFTA (03 countries), East Asia (11) and India in 2010. We do this regression exercise on cross sectional data for 2010. Gravity Analysis helps us to explain basis of trade of merchandize and services. Gravity model examines the role of tariff barriers, inter country dispersion of income, prices, trade costs, preferential trading arrangements, trade resistance terms, inflations, economic size and endowments, general policy environment and overall infrastructure, distance between trading partner, membership of multilateral agreement, foreign direct investments, common language and borders, common colony, among others on trade of merchandize and services. For Example Gravity Model can explain what is the basis of trade in Climate Smart Goods (64 goods list defined by the UNESCAP). CSG are defined as components, products and technologies which tend to have relatively less adverse impact on the environment. CSGs constitute low carbon technologies such as solar photovoltaic systems, wind power generation, clean coal technologies and energy-efficient lighting.

We use variant of the Baier and Bergstrand (2001) Gravity formulation. The theoretical justification of using the present gravity formulation is given in Appendix Table X. This study uses gravity analysis which explains log of imports as a function of log of sum of GDPs of the trading partner, log of distance( capturing trade cost in the form of transportation cost, maybe language barriers ,common border and common preferential trading arrangement), log of inter-country dispersion(log of si*sj), log of tariffs-weighted applied tariffs log (1+tariffs) and log of prices in reporting(importer country) and log of prices in partner(exporter country)

We consider 62 trading partners in 2010 .

Data and data requirements for gravity analysis

Import data to and from Ecuador of CSG goods-one category made of the list of 64 goods (under 6 Digit HS Combined) is taken from WITS data base for 2010

GDP data of trading partners is expressed in billions of US dollars and the basic source of data is the IMF, World Economic Outlook (April 2011 edition)

Distance data is taken from the dist_cepii.xls file of CEPII data base(cepii.fr)

Tariff data is applied weighted tariff (%) on CSG goods for each country available from the TRAINS data (within WITS data base)

Inter country dispersion is product of two terms si *sj where si=GDPi/(GDPi+GDPj) and sj=GDPj/(GDPi+GDPj). Si and Sjis constructed from GDP data of trading partners. The product has an inverse relationship with variance of country's share of income in total group income. Variance of country's share of income in total group income is inversely related to volume of trade between countries. Please see appendix Table X for understanding the relationship between volume of trade and inter country dispersion of income.

Prices data of reporter (importer) and partner (exporter) from the GDP deflators available from the World Bank World Development Indicators available at the World Bank website for 2010(Index Numbers)

Hypotheses

• Sum of GDPs (sizes) matter for imports of country. Positive sign is hypothesized

• Distance is negatively related to imports. Greater distance means larger transportation cost, maybe higher language barriers, no common borders and limited access to each other's goods because of limited open regionalism.

• Lower is the inter country dispersion of income (si*sj) higher is the trade between countries (Helpman and Krugman, 1985). See Appendix Table X for understanding the relationship between equality of income and volume of trade.

• Larger are the tariffs, lower will be the imports as tariffs are trade costs

• Higher prices in reporter country increases imports while lower prices in partner country lowers imports. Higher the price in the exporter's country more is the incentive to supply CSG goods abroad.

• All variables are in logs(natural) so the estimates of parameters will capture elasticity of explanatory variables with respect to imports

 
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